Portfolio Credit Risk Measurement Based On Pair-Copula

With the development of economy, the companies have more and more close contact between serial guarantees, cross-shareholdings and lending relationship.If one company is default, the associated companies'default risk are bound to be changed and the market will start to evaluate associated company. At the same time, the change of the company's assets will cause huge losses for bank and pose great challenges to the bank credit risk management. In order to avoid or prevent the occurrence of this phenomenon, we need to study the default correlation among various economic entities into the credit risk management system, to prevent and control the risk of default effectively.Firstly, this paper introduced in detail the basic theory of Copula and Pair-Copula and introduced several kinds estimation method of VaR model; Secondly, we got the distribution of the company's assets value based on the Merton model, and dominant expression was given under the hypothesis of a given default risk metric; Thirdly, we gave the combination defaults expression and introduced the process of using Pair-Copula constructed the related structure of assets value, and the VaR is given based on the Monte Carlo simulation method under the premise of Pair-Copula. Finally, the three companies affiliated to the Of faw department is discussed as the research object. We analyzed the three companies' assets value relevance by adopting Gaussian Copula and Pair-Copula, and the VaR is given through Monte Carlo simulation of two cases. Through comparative analysis to the result of the two kinds of VaR, we can see that the Pair-Copula can more accurately capture the random variables between different local related structures, and can be better to measure the risk of default.