Chapter 5
Modeling Heterogeneity of Credit Portfolios: A Top-Down Approach
Top-down models of credit portfolios have become popular in recent years due to their simplicity and computational efficiency. In terms of individual constituents of a credit portfolio, a top-down approach is usually associated with a limit of a homogeneous portfolio where all obligors have equal spreads, notionals, and recoveries. In this chapter, we present several extensions of such a classical top-down (TD) setting that account for heterogeneity in all these parameters. In particular, we introduce a simple and numerically efficient way of dissecting the portfolio risk into contributions of individual names, and show how ...
