PPT Slide
Two obligors are sensitive to the same set of background factors (with
differing weights), their default probabilities will move together.
These co-movements in probabilities give rise to correlations in
Observed default probabilities are volatile over time, even for obligors
having comparable credit quality. The variability of default
probabilities can be related to underlying variability in a number of
background factors, like the state of the economy.
CreditRisk+ does not attempt to model correlations explicitly but
captures the same concentration effects through the use of default
rate volatilities and sector analysis.