A Generalized Single Common Factor Model of Portfolio Credit Risk,” presented at

The Vasicek single factor model of portfolio credit loss is generalized to include correlated stochastic exposures and loss rates. The new model can accommodate any distribution and correlation assumptions for the loss and exposure rates of individual credits and will produce a closed-form approximation for an asymptotic portfolio’s conditional loss rate. Revolving exposures are modeled as draws against committed lines of credit. Draw rates and loss rates on defaulted credits are random variables with known probability distributions. Dependence among defaults, individual exposures, and loss rates are modeled using a single common Gaussian factor. A closed-form expression for an asymptotic portfolio’s inverse cumulative conditional loss rate is used to calculate a portfolio’s unconditional loss rate distribution, estimate economic capital allocations, and analyze portfolio loss rate characteristics. Positive correlation in individual credit exposures and loss rates increases systematic risk. As a consequence, portfolio loss rate distributions exhibit wider ranges and greater skewness