The structure of credit risk: spread volatility and ratings transitions

Quarterly Bulletin 2001 Q2
Published on 01 June 2001

By Rudiger Kiesel, William Perraudin and Alex Taylor

Regulators designing capital requirements for loan portfolios or senior bankers deciding levels of economic capital for their institutions need to know the magnitudes of the risks involved in holding portfolios of credit exposure of different types. This paper quantifies the risks involved in holding large portfolios of different credit qualities and times to maturity. To accomplish this, we formulate a ratings-based credit risk model and simulate it for large portfolios of credit exposures.

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