Credit Risk Fundamentals › Key Parameters
Michael BrenndoerferDecember 21, 20251 min read
Quantitative FinanceAll chapters Part 10 of 15Risk Management and Financial Risk Controls
Credit Risk Fundamentals › Key ParametersOne section · Sections in this chapter12 / 15 ↓
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The key parameters for portfolio credit risk modeling are:
- PD (Probability of Default): Likelihood of borrower default, driving expected loss.
- LGD (Loss Given Default): Severity of loss, scaling the exposure at risk.
- EAD (Exposure at Default): Magnitude of the credit exposure.
- Default Correlation (): The degree to which default events cluster. Higher correlation significantly increases tail risk (Unexpected Loss and VaR) while having no effect on Expected Loss.
- Confidence Level: The probability threshold for Value-at-Risk calculations (e.g., 99% or 99.9%).