Model Risk in Credit Portfolio Models

TL;DR

This paper addresses the often-overlooked issue of model risk in credit portfolio models by proposing a comprehensive and practical approach to managing uncertainty in all model parameters.

Contribution

It introduces a novel, easy-to-implement method for handling uncertainty in all parameters of credit portfolio models, filling a significant gap in existing risk management practices.

Findings

Provides a unified framework for model risk management

Demonstrates practical implementation of the approach

Enhances robustness of credit portfolio models

Abstract

Model risk in credit portfolio models is a serious issue for banks but has so far not been tackled comprehensively. We will demonstrate how to deal with uncertainty in all model parameters in an all-embracing, yet easy-to-implement way.