An importance sampling method based on variance minimization with applications to credit risk

A model for credit risk was established and a new method is presented to deal with credit risk assessment problems for commercial banks based on rare event simulation. The failure probability of repaying loans of listed company is taken as the criterion to measure the level of credit risk. The rare-event concept is adopted to construct the model of credit risk identification in commercial banks, and importance sampling scheme is designed to implement the rare event simulation, based on which the loss probability can be assessed. The simulated results show that the rare event simulation method can effectively solve the credit risk problem.