2015-08-24Buch DOI: 10.18452/4599
Copula-Based Factor Model for Credit Risk Analysis
Chen, Cathy Yi-Hsuan
Härdle, Karl Wolfgang
A standard quantitative method to access credit risk employs a factor model based on joint multi- variate normal distribution properties. By extending a one-factor Gaussian copula model to make a more accurate default forecast, this paper proposes to incorporate a state-dependent recovery rate into the con- ditional factor loading, and model them by sharing a unique common factor. The common factor governs the default rate and recovery rate simultaneously and creates their association implicitly. In accordance with Basel III, this paper shows that the tendency of default is more governed by systematic risk rather than idiosyncratic risk during a hectic period. Among the models considered, the one with random factor loading and a state-dependent recovery rate turns out to be the most superior on the default prediction.
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Is Part Of Series: Sonderforschungsbereich 649: Ökonomisches Risiko - 42, SFB 649 Papers, ISSN:1860-5664