Research Article | Published 6 May 2019
Biao Wu*
Credit Modeling and Methodology, Royal Bank of Canada, Toronto, ON, Canada
Vasicek’s homogeneous loan portfolio theory has been influential in both research and industry practice of credit risk management. However, big loan portfolio is usually heterogeneous in nature, meanwhile it can consist of a number of homogeneous sub-portfolios. Herein, a theoretical framework extending that of Vasicek’s is proposed for heterogeneous loan portfolio. The probability of default distribution and its limit is studied. Similar to Vasicek’s homogeneous loan portfolio percentage loss distribution, this limiting PD distribution has the desirable properties including symmetry, mean, variance and percentile properties which can promote its application in practice. As a key analytical component it can also help the estimation of the loss distribution of heterogeneous loan portfolio.
Keywords: Probability of Default, Asset Correlation, Homogeneous Portfolio, Heterogeneous Portfolio, Probability of Default Distribution, Loan Loss Distribution
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