Recently, it's been increasingly important to manage the financial risk in the Korean financial institutions especially after the Asian Financial Crisis in 1997. For the financial institutions, particularly the banks, managing credit risk is more crucial than any other risks in financial sector since over 70% of their asset are exposed to the credit risk. And for managing credit risk more efficiently, it is necessary to measure credit risk of the portfolio.
For this purpose, this paper used well-known method-CreditMetrics from J.P. Morgan in implementing the portfolio credit risk measurement. And in that process, this paper tried to estimate the essential parameters of the model like Transition Matrix and Correlation Matrix from the data in Korean markets. Furthermore, for the purpose of applying this model to Korean financial market in the near future, this paper tried to look for the possible alternative of those parameters that can be better fitted for Korean markets.
This paper also implemented the Monte Carlo Simulation to compute the full distribution of portfolio value changes and discussed the results of simulation-based analysis and meanings of the risk estimates like standard deviation and percentiles in that portfolio. Finally, this paper measured the marginal risk of each asset in the portfolio and discussed it for emphasizing the usefulness of this method related to the efficient credit risk management.
