| There is a significant interest today to the default and credit risk modeling, which explains the great variety of books about economics dedicated to the mentioned topics. A few kinds of credit risk models are allocated in the contemporary literature. Most authors pay particular attention to the analysis of bankruptcy risk at the firm level. There have been allotted 4 groups of credit risk models for the analysis of portfolio risk. The structural group of models is based on the assumption that the default of a firm is explained by the fact that the value of its assets is lower than its liabilities' value. The second group includes the risk models of econometric factor and their supposition is that the credit risk of homogeneous subgroups is defined by macroeconomics index and several other econometric factors. The above mentioned 2 groups of risk models have a common approach that is declared in computing default rates. The third group includes the actuarial models that do not refer to causality. And finally, the fourth group of risk models is dedicated to the methods of non-parametric factors.
Though the principles of the mentioned four types of default risk models are seemed to be completely different, they are still based on three common components that are applied to calculate portfolio loss distributions. These are the following: the process of producing conditional credit rates for the borrowers, the structure permitting to calculate conditional default rate distributions and the aggregation of homogeneous sub-portfolios' conditional distributions. The experts also underline that all the default risk models have common mathematical structures.
In addition to the use of the portfolio credit risk models to analyze portfolio risk, the default risk models are also applied in order to calculate the capital requests for banks. For example, the works of Extrella are devoted to the development of the model of optimal bank capital. Moreover, several works are connected with the reference of macroeconomic conditions to the credit risk management. You can also find a detailed survey on the introduction of systemic impacts into risk evaluation in the study accomplished by Allen and Saunders.
A considerable influence on the modern society has a paper that is devoted to the development of a survival time model for bankruptcy of business-loan borrowers. The specifics of this model is that it combines firm-specific, as well as macroeconomic variables. This way, the duration model can be successfully applied not only for business default analysis, but in the form of a portfolio credit risk model as well. |
Article Details
