Abstract:Within the past two years, important advances have been made in modeling credit risk at the portfolio level. Practitioners and policy makers have invested in implementing and exploring a variety of new models individually. Less progress has been made, however, with comparative analyses. Direct comparison often is not straightforward, because the di erent models may be presented within rather di erent mathematical frameworks. This paper o ers a comparative anatomy of two especially influential benchmarks for credit risk models, J.P. Morgan's CreditMetrics and Credit Suisse Financial Product's CreditRisk+. We show that, despite di erences on the surface, the underlying mathematical structures are similar. The structural parallels provide intuition for the relationship between the two models and allow us to describe quite precisely where the models di er in functional form, distributional assumptions, and reliance on approximation formulae. We then design simulation exercises which evaluate the e ect of each of these di erences individually.
1 Summary of the models
1.1 Summary of CreditRisk+
1.2 A restricted version of CreditMetrics
2 Mapping between the models
2.1 Mapping CreditMetrics to the CreditRisk+ framework
2.2 Mapping CreditRisk+ to the CreditMetrics framework
3 Calibration and main simulation results
3.1 Portfolio construction
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4 Robustness of model results
5 Modi ed CreditRisk+ speci cations
Discussion
References
