Credit Value at Risk - Creditmetrics
3 important questions on Credit Value at Risk - Creditmetrics
What is Credit Risk Plus?
Credit Risk Plus is an analytic approximations for VaR
What model can be used for Credit Risk Plus to build uncertainty into the default rate?
One can use a monte carlo simulation to deal with the uncertainty in the default rate
What steps can be taken to simulate the Defaut rate?
1. Sample an overall default rate.
2. Develop a model relating the default rate for each category of obligors to the overall default rate. Use a regression model against the overall default rate
3. Sample a number of defaults for each category of obligors.
4. Sample a loss given default for each default in each category.
5. Calculate the total loss from the defaults.
6. Repeat steps 1 to 5 many times to build up a probability distribution for the total loss.
7. Calculate the required VaR from the total loss probability distribution.
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