Chapter 10. Dependence Modeling and Credit Migrations

10.1. Introduction

The traditional and often discussed starting point in approaching credit risk issues is a single loan or bond. This special case makes it fairly easy to derive meaningful statistics like the expected loss, the likelihood of default in a given period of time or the expected loss, VaR, etc., that allow us to quantify inherent credit risk.

But when it comes to the question of how to proceed in the case of a portfolio of such instruments where diversification or concentration effects play an important role, methodology starts to differ considerably. All approaches, though, have one thing in common: in order to capture portfolio effects, they all consider implicitly or explicitly ...

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