Portfolio Credit Risk : Top down Vs . Bottom up Approaches

Dynamic reduced form models of portfolio credit risk can be distinguished by the way in which the intensity of the default process is specified. In a bottom up model, the portfolio intensity is an aggregate of the constituent intensities. In a top down model, the portfolio intensity is specified without reference to the constituents. This expository article contrasts these modeling approaches. It emphasizes the role of the information filtration as a modeling tool. ∗Department of Management Science & Engineering, Stanford University, Stanford, CA 943054026, USA, Phone (650) 723 9265, Fax (650) 723 1614, email: [email protected], web: www.stanford.edu/∼giesecke. †I would like to thank Rama Cont, Lisa Goldberg and Jack Kim for helpful discussions, comments and suggestions.