Group for Research in Decision Analysis

G-2016-123

NORTA for portfolio credit risk

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We use NORTA (NORmal To Anything) to enhance normal credit-risk factor settings in modeling common risk factors and capturing contagion effects. NORTA extends the multivariate Normal distribution in that it enables the simulation of a random vector with arbitrary and known marginals and correlation structure. We solve for NORTA and experiment with Normal, Student, and Asymmetric Exponential Power (AEP) distributions. We match NORTA models to Normal models with the same marginals' first moments. Yet, differences in credit-risk measures can be highly significant. This supports NORTA as a viable alternative for credit-risk modeling and analysis.

, 20 pages