Fast and accurate simulation of differently seasoned loan defaults in a Merton-style framework in discrete time

Varsanyi, Zoltan (2008): Fast and accurate simulation of differently seasoned loan defaults in a Merton-style framework in discrete time.

Abstract

In this paper I present a method for the simulation of the default of such loans that have two important properties: they are seasoned – maybe even being at different points of the seasoning curve – and they evolve in an asset-value based framework. This latter model allows us to introduce correlation between the loan defaults. Although these two features are widely considered in modelling, linking them into one single (simulation) framework might not be that common. However, the most important merit of this paper is showing a fast and accurate simulation algorithm for the asset values.

• Item Type: MPRA Paper
• Language: English
• Keywords: credit risk; simulation
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General

References

Varsanyi, Z. (2006): “The Basel II IRB approach revisited: do we use the correct model?”, MPRA Paper 1244, University Library of Munich, Germany.