Table of Contents
ISRN Probability and Statistics
Volume 2012, Article ID 832175, 42 pages
Review Article

Credit Portfolios, Credibility Theory, and Dynamic Empirical Bayes

Department of Statistics, Stanford University, Stanford, CA 94305, USA

Received 21 October 2012; Accepted 11 November 2012

Academic Editors: I. Beg and M. Scotto

Copyright © 2012 Tze Leung Lai. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


We begin with a review of (a) the pricing theory of multiname credit derivatives to hedge the credit risk of a portfolio of corporate bonds and (b) current approaches to modeling correlated default intensities. We then consider pricing of insurance contracts using credibility theory in actuarial science. After a brief discussion of the similarities and differences of both pricing theories, we propose a new unified approach, which uses recent advances in dynamic empirical Bayes modeling, to evolutionary credibility in insurance rate-making and default modeling of credit portfolios.