I need to create a loss distribution for a credit portfolio as the first steps to estimate the portfolio Credit VaR.
I have historical monthly account snapshots (payment history) of all accounts going back 5 years. I need a simple intuitive approach.
I will assume that defaults are uncorrelated and also the recovery rate for all defaulted loans is same (x%)
I am thinking of below steps:
-Pick a vintage- Say Jan 2015.i.e the population to study is all loans opened in Jan 2015.
-For each loan in above, see how many defaulted within 12 months of origination. Say p%
-Assume a standard recovery rate (x%) for defaulted loans.
-Loss of this particular vintage within 1 year = Sum(pxindividual loan balance at default)
Now I repeat the calculation selecting a different vintage..i.e loans originated in Feb 2015. I have 5 years(60 months), so I will have 60 different values of expected loss. Using this, if I draw a histogram , where the x axis represents different values of the EL and y axis the relative frequency of that particular loss, I have a probability density function. Can this be used as a loss distribution?
If yes, I can proceed to calculate the x value corresponding to the 5% significance level and that will be my VaR, correct?