In this paper we generalize Vasicek's Asymptotic Single Risk Factor (ASRF) solution to multiple factors organized with a particular hierarchical structure. We use this model to investigate credit portfolio loss. In this hierarchical factor model, asset returns of a company depend on a global factor, a sector factor, and an idiosyncratic risk factor. All… (More)
Modeling how the returns of assets in a portfolio are correlated is crucial to properly understand and price the risk in the portfolio. In this report we discuss methods for approximating a full correlation matrix with a k-factor model. We then discuss methods for efficiently simulating asset returns given such a model.