An Approximation for credit portfolio losses

Rüdiger Frey, Monika Popp, Stefan Weber

Publication: Scientific journalJournal articlepeer-review

Abstract

This paper discusses a new approximation for the loss distribution in mixture models of portfolio credit risk, based on a normal approximation to the conditional loss distribution and the Berry-Esseen inequality. Applications to the risk management for credit portfolios and to the pricing of multi-name credit derivatives in factor copula models are discussed. A numerical case study shows that the method provides substantially more accurate results than the standard Vasicek approximation, while being at the same time computationally less expensive than standard Monte Carlo algorithms.
Original languageEnglish
Pages (from-to)3 - 20
JournalJournal of Credit Risk
Volume4
Issue number1
Publication statusPublished - 1 May 2008

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