Hazard Rate Based Credit Portfolio Models
From Open Risk Manual
Definition
Hazard Rate Based Credit Portfolio Models' denotes a mathematical framework and computational method used in the Monte Carlo Simulation of Credit Portfolios that captures Dependency and Correlation between credit events using concepts from survival analysis and poisson point processes
Methodology
The following documents the mathematical structure of hazard rate based models. There are two categories of models that can be constructed on the basis of similar mathematical machinery[1]
Bottom Up Models
- Individual Hazard Rate / Default Intensity
- Dependency is introduced primarily via common Macroeconomic Factors and similar covariates
Top Down Models
- Portfolio Level hazard rate / default intensity
- Dependency is implicity in the process model
Model Inputs
Model Outputs
References
- ↑ Giesecke, Portfolio Credit Risk, Top Down vs Bottom Up approaches, 2008
