Hierarchical Copulae in Credit Risk Modeling

Abstract

Importance This research outlines an economic and mathematical model of the overdue loan debt. The model is based on copula functions allowing to simulate a non-Gaussian distribution of financial risks and credit risk, in particular.Objectives The research models a joint distribution of overdue debt series in order to forecast the credit risk exposure. Relying upon the forecast, we intend to evaluate the efficiency of methods used to make provisions for possible losses and subsequently determine a reasonable approach to accruing the provision. Methods We examine whether hierarchical copula models can be applied to build the joint distribution of overdue loan debt series in relation to banking institutions. It is considered as the basis for making further estimates of the overdue loan debt. Results We build and evaluate a multivariate copula model of overdue loan debt with the hierarchical structure.

Hierarchical Copulae in Credit Risk Modeling

“…Reading through multiple papers on vine-copulae, for purposes of this research, we highlight several foreign publications [6,7], paper by A.I. Travkin [8], and a training course by S.A. Aivazyan 4 .…”