Heterogenous Credit Model

Overview

In the heterogenous model, loans can be modeled as coming from different default distributions. The primary way this is done is by categorizing the loans into a set of laon grades, which are defined so that loans of similar credit risk (typically defined by probability of default) are grouped together.

Estimation of Probabilities

• Probability of Single Default - estimating the probability of default based on history of a loan.
• Probability of Joint Default - estimating the probability of two loans defaulting in the same period. The probability of joint default together with the probability of a single loan defaulting implies the default correlation.
• Maximum Likelihood - the process of maximum likelihood provides a procedure for estimating the probabilities and joint default probabilities using the latent factor default model.

Heterogenous Model Desktop

The following desktop conains the scripts necessary to run the homgeonous default model