One-Factor Copula-Based Model for Credit Portfolio

Aim of this research paper it to develop an alternative model for portfolio credit risk to those widely used - CreditRisk+ and CreditMetrics. The model aspires to patch the usual weak points of portfolio credit models and also is easy to implement. General engine relies on one-factor copula model and a concept of generating functions. Proposed model also uses only elementary inputs, which make it quick to deploy in the banking environment. The output is the usual credit VaR. We also illustrate various methods related to the implementation and incorporation of credit wrong-way-risk. As a particular case of the implementation, double t–copula is chosen in combination with a stochastic LGD feature. Finally, we show the incidence on capital requirement of various models by testing them on a sample portfolio