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KISS Approach To Credit Portfolio Modeling

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Executive Summary

A simple, yet reasonably accurate, analytical technique is proposed for multi-factor structural credit portfolio models. The accuracy of the technique is demonstrated by benchmarking against Monte Carlo simulations. The approach presented here may be of high interest to practitioners looking for transparent, intuitive, easy to implement and high performance credit portfolio model. Structural multi-factor Economic Capital (EC) models derived from the CreditMetrics framework (Gupton et al., 1997) have become the most widely adopted tools for risk quantification in credit portfolios.

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