Global Credit Risk Modeling

Jan 1, 2002

Barra is releasing a newly constructed global model of credit risk providing forecasts of asset and portfolio risk due to market-wide spread changes and issuer-specific credit events. The global credit risk model provides detailed factor models for four major markets, covering credit-risky bonds denominated in US dollars, yen, sterling and euro, and simpler sway-based models of credit spread risk in other markets. In addition, the model incorporates factors for bonds of 26 emerging market issuers. Consisting of a large number of local-market factors, the components of this model are linked together into a single global model by means of a reduced set of global factors, thereby minimizing spurious correlations while preserving accurate volatility forecasts. The Barra TotalRisk System (TM) already incorportes a version of this model including credit factors for US dollar-denomiated bonds, including enhanced versions of TotalRisk and Cosmos, are scheduled for release in the spring and summer of 2002. This note describes the structure of the models -- the spread factor models, their integration with the interest rate risk models and the issuer- and security-specific risk models.