Copula-Based Credit Risk Assessment for a Large Scale Small to Medium Enterprises' Financial Data

A copula is a general tool to construct multivariate distributions and to investigate dependence structure between random variables. A copula is a function expressing multivariate simultaneous distribution by dividing it into a peripheral distribution of each variable and a dependence structure between distributions. In the situation where the creditworthiness of each business loan depends on each other, it would have a strong dependency structure between distributions at the tail of the distribution. Since it is possible to incorporate strong dependence into risk assessment by using copulas, it draws attention in financial practice.The purpose of this study is to estimate probability of default of companies using copulas, assuming that the estimated probability of default of a company changes between years. The correlation structures would be different, so the authors find out which copulasâ€™ shape is closely estimated by simulation. Index Terms - Credit risk, Estimated probability ofdefault, Copulas.