Risk Factor Transformations Relating CreditRisk⁺ and CreditMetrics

Summary

CreditRisk⁺ and CreditMetrics furnish special cases of general credit risk factor models. On a respective model space, there is a symmetry of factor transformations that relates identical though differently represented models. In the simplest case of homogeneous one-factor one-band-models, there is an approximate symmetry between consistently parametrized CreditRisk⁺ and CreditMetrics. This can be viewed as evidence that there exists in general a consistent parametrization of both models that results in the same loss distribution.

The views expressed herein are my own and do not necessarily reflect those of the HSH-Nordbank. I would like to thank Susanne Gögel, Jörg Lemm, and Klaus Pinn at the WGZ Bank for helpful discussions.