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FRM Part II · FRM Exam Part II · Portfolio Credit Risk

Which feature is common to the CreditMetrics and Moody's KMV approaches but is NOT a feature of CreditRisk+?

The shared feature is that default dependence arises from a structural asset-value model with correlated asset returns. CreditRisk+ does not use this; it uses Poisson defaults with stochastic default rates, exposure bands and a probability-generating function.

  1. ADefault correlation is generated through a latent asset-value or factor model linked to the firm's valueCorrect
  2. BDefaults follow a Poisson distribution with stochastic mean
  3. CThe loss distribution is computed analytically using a probability-generating function
  4. DExposures are grouped into bands of similar size

Explanation

CreditMetrics and KMV derive default dependence from asset-value (structural) models with correlated asset returns. CreditRisk+ instead uses Poisson default counts with random mean default rates driven by background factors, computes the loss distribution via a probability-generating function, and uses exposure bands.

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