WIAS Preprint No. 846, (2003)

Numerically stable computation of CreditRisk+



Authors

  • Haaf, Hermann
  • Reiß, Oliver
  • Schoenmakers, John G. M.
    ORCID: 0000-0002-4389-8266

2010 Mathematics Subject Classification

  • 91B30 60-08 60E10

Keywords

  • Credit risk, Probability generating function, Computation of functions of power series, Numerical stability

Abstract

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.

Appeared in

  • Journal of Risk (2004) Vol. 6, Nr. 4, pp. 1-10

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