By Pamela Nickell, William Perraudin and Simone Varotto
In the last five years, many banks have implemented elaborate credit risk models in order to assess the risk of their corporate credit exposures. Such models provide a framework for calculating the joint distribution of future portfolio returns based on consistent assumptions about the risks inherent in individual exposures and hypotheses about the degree of correlation between changes in the value of these exposures.
Ratings versus equity-based credit risk modelling: an empirical analysis