Credit Risk Models

In Section 10.3 we defined the loss variables as indicators of default events. A very common approach in actuarial mathematics is modeling the defaults by Bernoulli or Poisson random variables. This approach is preferred by the following credit risk models: CreditMetricsTM, an original model proposed by the US bank J.P. Morgan, under which the default probabilities of debtors belong to different rating classes; CreditPortfolioViewTM, a model developed by McKinsey, based on an econometric analysis of the relationships between default probabilities or default migrations and the state of the macroeconomic cycle; CreditRisk +, a model proposed by Credit Suisse Financial Products, based on some actuarial mathematical models; PortfolioManagerTM, a model developed by Moody’s KMV, based on the default probability estimation methods through the Merton model.