Credit Risk Portfolio Diversification: Credit Value at Risk

The evaluation of credit risk on a single transaction is a difficult exercise. It requires evaluation of the probability of default over time, the loss given default, and a risk-adjusted discount rate. This was discussed in Chapter 15. The evaluation of credit risk on a portfolio of loans is an even more daunting task. Significant conceptual and applied progress has been made in recent years. This has opened the way to the trading of credit risk, to securitization, and to the use of credit derivatives. The purpose of this chapter is to highlight the sources of difficulty in ...

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