Factor Models: Portfolio Credit Risks When Defaults are Correlated

Abstract

This article discusses factor models for portfolio credit. In these models, correlations between individual defaults are driven by a few systematic factors. By conditioning on these factors, defaults observed within are independent. This allows a greater degree of analytical tractability in the model with a realistic dependency structure.

Citation

SCHÖNBUCHER, P.J. (2001), "Factor Models: Portfolio Credit Risks When Defaults are Correlated", Journal of Risk Finance, Vol. 3 No. 1, pp. 45-56. https://doi.org/10.1108/eb043482