The CreditMetrics risk model

Credit risk is the risk that an unexpected event, related to the repayment capacity or creditworthiness of a counterparty, will change the value of the credit position.

In assessing credit risk, we can distinguish between the default mode approach, which only considers the occurrence of insolvency, and a multi-state approach, in which even the deterioration of the counterpart's creditworthiness represents a source of credit risk.

The first approach envisages two possible states for a credit position: default or non-default. The occurrence of the default event is determined exclusively by the default probability of the associated binary variable. The multi-state approach considers the migration risk, which is ...

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