The hybrid saddlepoint method for credit portfolios

Anthony Owen, Alistair McLeod and Kevin Thompson derive a practical analytic approach, which they call the hybrid saddlepoint method, to calculate the credit loss distribution for a heterogeneous portfolio of correlated obligors

Most real-world portfolios are not homogeneous in exposure or probability of default yet many practitioners use analytic portfolio models that explicitly or implicitly assume homogeneity. This can lead to significant errors when estimating the shape of the loss distribution, calculating quantities such as the value-at-risk or valuing tranches of structured products. One such approach is the standard saddlepoint approximation derived by Daniels (1954) to estimate the density of the mean of

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

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