Numerically stable computation of CreditRisk+
The CreditRisk model launched by CSFB in 1997 is widely used by practitioners in the banking sector as a simple means for the quantification of credit risk, primarily of the loan book. We present an alternative numerical recursion scheme for CreditRisk, equivalent to an algorithm recently proposed by Giese, based on well-known expansions of the logarithm and the exponential of a power series. We show that it is advantageous to the Panjer recursion advocated in the original CreditRisk document, in that it is numerically stable. The crucial stability arguments are explained in detail. Furthermore, the computational complexity of the resulting algorithm is stated.
|Author:||Hermann Haaf, Oliver Reiß, John Schoenmakers|
|Date of first Publication:||28.01.2004|
|Institute:||Weierstraß-Institut für Angewandte Analysis und Stochastik (WIAS)|
|Project:||E5 Statistical and numerical methods in modelling of financial derivatives and valuation of risk|
|Preprint Number:||Matheon Preprint #49|