The Schism in Credit Risk Management 9

Credit risk is currently a hot spot in risk management. The theorists and quantitative wizards who cut their teeth on market risk recently turned their focus to credit risk. Some of the models they built have radically altered how credit risk is measured and managed. These models have even stirred credit markets with new and quite controversial products—credit derivatives. The new methods have also turned the cultural schism between traders and traditional lenders into an open war over how credit risk should be managed. Before we tread onto that battlefield, let's trace the roots of the schism. A brief examination of why credit risk management is harder than market risk, coupled with a review of credit markets' ...

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