Monte Carlo Methods for Portfolio Credit Risk

The financial crisis of 2007 – 2009 began with a major failure in credit markets. The causes of this failure stretch far beyond inadequate mathematical modeling (see Donnelly and Embrechts [2010] and Brigo et al. [2009] for detailed discussions from a mathematical finance perspective). Nevertheless, it is clear that some of the more popular models of credit risk were shown to be flawed. Many of these models were and are popular because they are mathematically tractable, allowing easy computation of various risk measures. More realistic (and complex) models come at a significant computational cost, often requiring Monte Carlo methods to estimate quantities of interest.

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