Credit risk measurement: Developments over the last 20 years

TLDR

The paper is divided into two parts. The paper traces 20 years of credit‑risk measurement literature and introduces a mortality‑risk‑based framework for assessing loan and bond risk and returns. The study reviews literature on individual and portfolio credit‑risk measurement and then proposes a mortality‑risk framework for evaluating loan and bond risk and returns. The mortality‑risk model shows promise for analyzing risk‑return structures of credit‑risk‑exposed debt portfolios.

Abstract

This paper traces developments in the credit risk measurement literature over the last 20 years. The paper is essentially divided into two parts. In the first part the evolution of the literature on the credit-risk measurement of individual loans and portfolios of loans is traced by way of reference to articles appearing in relevant issues of the Journal of Banking and Finance and other publications. In the second part, a new approach built around a mortality risk framework to measuring the risk and returns on loans and bonds is presented. This model is shown to offer some promise in analyzing the risk-return structures of portfolios of credit-risk exposed debt instruments.