"Modeling Portfolio Credit Risk Taking into Account the Default Correlations Using a Copula Approach: Implementation to an Italian Loan Portfolio"

This work aims to illustrate an advanced quantitative methodology for measuring the credit risk of a loan portfolio allowing for diversification e ects. Also, this methodology can allocate the credit capital coherently to each counterparty in the portfolio. The analytical approach used for estimating the portfolio credit risk is a binomial type based on a Monte Carlo Simulation. This method takes into account the default correlations among the credit counterparties in the portfolio by following a copula approach and utilizing the asset return correlations of the obligors, as estimated by rigorous statistical methods. Moreover, this model considers the recovery rates as stochastic and dependent on each other and on the time until defaults