Loan portfolio pricing model based on default correlation

The default distances of listed corporation in different time intervals during the loan period are calculated following the KMV model. Then, the correlation coefficient matrix of default distances of listed corporations is calculated accordingly. Substituting the correlation coefficient matrix and the default distances into the Gaussian copula function, the joint default probability of each default status of listed corporations is calculated. The risk free interest rate during the loan period is forecasted by the CKLS model. Under no-arbitrage equilibrium condition, a loan portfolio pricing model is established which reflects not only the default correlation of the listed corporations but also the fluctuation of risk free interest rates.