Proceedings of the 35th conference on Winter simulation: driving innovation
An importance sampling method for portfolios of credit risky assets
WSC '04 Proceedings of the 36th conference on Winter simulation
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The distribution of possible future losses for a portfolio of credit risky corporate assets, such as bonds or loans, shows strongly asymmetric behavior and a fat tail as the consequence of the limited upside of credit (the promised coupon payment) and substantial downside if the corporation defaults. Because of correlation, it is not possible to fully diversify away this fat tail. Detailed correlation models require Monte Carlo simulation to determine the loss distribution for a credit portfolio. This tutorial covers the basics of credit risk modeling including an overview of the credit markets, a summary of what data are available for defining and calibrating models, and a discussion of key modeling questions. Finally a detailed discussion of simulation methods used in calculation credit portfolio loss distribution and related credit risk measures is presented.