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Credit Risk [21]

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Bullet points include: Single index or factor for each obligor, (log) return of k’th firm’s equity value might be taken to be: Where, f = (standardised) factor return, alpha k = exposure of that firm to the market-wide factor and epsilon k = idiosyncratic noise term for that firm, epsilon k and f assumed to be zero-mean, unit variance random variables, Standard benchmark case as used in Basel II parameterisation – one factor and pairwise latent variable correlation alpha 2 of around 0.2. C.f. factor risk models as per Session on market risk (especially multi-factor analogues) and Gaussian copula pricing models

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