Links to all tutorial articles (same as those on the Exam pages)Credit Portfolio View
This is the second of five articles that discuss the various approaches to measuring credit risk in a portfolio. This article covers CreditPortfolio view. CreditPortfolio View is conceptually not too dissimilar from the Credit Metrics model described earlier, ie it relies upon a knowledge of the transition matrices between the different credit ratings. The only difference is that the transition matrix itself has an adjustment applied to it for the business cycle. But once this adjusted transition matrix has been obtained, the rest of the process works in the same way as for the Credit Metrics model.
Now Pj,t itself is a logit function – and these have the useful property that their value varies between 0 and 1 – exactly what we need for something to be a probability. |