| There is a big interest these days to the default risk models, and this fact explains the wide variety of books about economics dedicated to the above mentioned topics. A few types of default risk models are allocated in the literature. The majority of authors pay particular attention to the analytical processes of default risk at the firm level. There have been developed 4 groups of default risk models in order to analyze portfolio risk. The structural group of models is based on the principle that the default of a firm is caused by the fact that the value of its assets is lower than the value of its liabilities. The second group includes the models of econometric factor and their statement is that the credit risk of similar subgroups is determined by macroeconomic index and several other econometric factors. The mentioned two groups of risk models get a common approach that is expressed in computing bankruptcy rates. The following group includes the actuarial models that don't refer to causality. And finally, the fourth group of default risk models is dedicated to non-parametric methods.
Although the principles of the mentioned four kinds of default risk models are seemed to be totally different, they are still founded on three common ingredients that are applied in order to calculate portfolio loss distributions. These are the procedure of producing conditional default rates for the borrowers, the set-up allowing to calculate conditional default rate distributions and the aggregation of homogeneous sub-portfolios' conditional distributions. The specialists also emphasize that all the portfolio credit risk models have similar mathematical structure.
Beside the application of the default risk models to analyze portfolio risk, the default risk models are also used for calculation of capital requests for banks. For instance, the macroeconomic works of Extrella are devoted to the development of the model of optimal bank capital. Moreover, several works are linked with the relevance of macroeconomics conditions to the bankruptcy risk management. You can get a detailed survey on the incorporation of systematic impacts into risk assessment in the study performed by Saunders and Allen.
A considerable weight in the modern society has a paper that is devoted to developing a duration model for the survival time for default of business-loan borrowers. The specifics of the mentioned model is that it includes firm-specific and macroeconomic explanatory variables. This way, the model can be successfully used not only for business default analysis, but as a portfolio default risk model as well. |
