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Ökonomisches Kapital

Stability of Credit Portfolio Models

Master Thesis in "Mathematical Finance", Oxford (2008)

 

In this thesis we examined the stability of credit portfolio models which are at the heart of modern credit risk management. Therefore, we investigated the impact of changes in certain model parameters or the portfolio setup on the loss distribution as well as the resulting economic capital. The parameters of interest for which we analysed the model sensitivities covered both, obligor specific (probability of default and loss given default) as well as portfolio specific quantities (correlation and concentration). For our numerical simulations we focused on CreditRisk+ and CreditMetrics since these models also are widely used within the banking industry. In order to quantify economic capital we used risk measures based on Value at Risk as well as Expected Shortfall, which have been controversially discussed in this context. Our main findings are that both models proved to be relatively stable over a wide parameter range of practical interest. However, even small parameter shifts as they can occur, e.g., in a period of economic downturn or simply as a result of parameter misspecification may lead to a quite dramatic increase of the predicted economic capital. Further, we found that both high portfolio concentration as well as strong correlations may lead to a breakdown of the standard behavior thereby indicating a model instability.