Internal Default Risk Model : Simulation of Default Times And Recovery Rates within the New FRTB Framework

This paper presents a new default risk model for market risk that is consistent with the requirements put forward by the Fundamental Review of the Trading Book. In particular, the model features correlated default times and stochastic recovery rates by exploiting the observed correlation between default frequency and average recoveries in historical data. Besides setting the mathematical background, we present numerical results and impacts of the various model parameters