A Survey of Credit Risk Models


Xin Xie, M.S. Defense

Advised by Runhuan Feng
Friday, August 6, 2010, 1:00 pm, EMS E408

Credit risk arises from the possibility that borrowers and counterparties in derivatives transactions may default. Since most recently financial crisis, the credit risk management developed rapidly by analyzing the credit risk models and the credit derivatives. In this thesis, we will introduce two credit risk models, Merton model, CreditRisk+ model, estimate the probability of default and the expected loss, and discuss the advantages and disadvantages of these models. To protect against credit risk, I will focus on credit default swaps in this thesis, and use JPMorgan's Approximation to find the relationship between the default probability and the fair spread. However, these models does not consider over credit trigger. To reduce the possibility of loss, we add credit trigger in compound Poisson model, and use numerical analysis to prove that credit trigger works well.


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