voramate01 / advance-credit-risk-model

Advance-Credit-Risk-Model

• Objective: Estimate the expected loss on a pool of mortgages. The loss model is built with three risk parameters: Probability of Default (PD) , Loss Given Default (LGD) and Exposure at Default (EAD)

• To help illustrate the methodology, the following variables are defined
  𝐿(𝑖,𝑡) : the loss amount given default on mortgage i at time t
  𝐸[𝐿𝑡] : the total expected loss amount at time t
  
  Based on A-IRB, the loss given default on mortgages are estimated by
  𝐸[𝐿𝑖,𝑡]=𝑃𝐷(𝑖,𝑡)∗𝐸𝐴𝐷(𝑖,𝑡)∗𝐿𝐺𝐷(𝑖,𝑡)
  𝑃𝐷𝑖,𝑡: the probability that mortgage I defaults over one-year period at time t (0-100%)
  𝐸𝐴𝐷𝑖,𝑡: the monetary exposure at default of mortgage I at time t
  𝐿𝐺𝐷𝑖,𝑡: the estimated economic loss given default of mortgage I at time t as a percentage of exposure (0-100%) PD, EAD and LGD, are modeled