Credit Risk : Valuation, Quality Migration, and KMV Approach

Abstract

In this paper, we show how CreditMetrics model quantifies the risk of credit loss resulting from modification of the creditworthiness of borrowers. Two measures are used by CreditMetrics in the appreciation of credit risk: the standard deviation and the percentile level. CreditMetrics approach estimates credit correlation from bond prices and credit spreads. It estimates the correlation in the movements of the credit spreads. The approach of KMV for credit valuation is based on option pricing model of Merton, and can then be applied to detect potential deterioration of credit using actual market data.