Technical papers/Credit Risk
CVA and the equivalent bond
Riccardo Rebonato, Mike Sherring and Ronnie Barnes investigate whether it is possible to model the credit valuation adjustment (CVA) by means of an equivalent bond, and if the regulatory Method 1 constitutes...
We use the CreditGrades credit risk model to value credit default swap spreads for companies found at the intersection of the S&P 100 index and Moody's Bottom Rung report for the period 2007Q3-2009Q2....
A market model for the dynamics of credit-risky baskets and indexes such as the iTraxx has long been sought, but because of difficulties with the natural numéraire has remained elusive. Here, Philippe...
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More Technical papers/Credit Risk articles
Modest means
Credit loss models typically calibrate default separate from loss given default. Here, Jon Frye calibrates simultaneously, using credit loss data. This produces a surprising test result: the credit loss models do not significantly outperform a statistical...
Variance-covariance-based risk allocation in credit portfolios
Mikhail Voropaev proposes high-precision analytical approximation for variance-covariance-based risk allocation in a portfolio of risky assets. A general case of a single-period multi-factor Merton-type model with stochastic recovery is considered. The...
Last option before the armageddon
Damiano Brigo and Massimo Morini show how the pricing of credit index options depends on the probability of a financial portfolio 'armageddon'. They introduce a new equivlent pricing measure that lays the foundation for a market model framework in multi-name...
A rotationally invariant technique for rare event simulation
Because of their low probability, including extreme events in Monte Carlo calculations of the value-at-risk of a credit-risky portfolio requires many simulations. Here, Susanne Klöppel, Ranja Reda and Walter Schachermayer demonstrate a geometrically...
Rehabilitating innovation
The financial crisis has put greater focus on the accuracy of models, with some regulators criticising banks for placing too much reliance on model outputs. In an introduction to this month's Cutting Edge section, Mauro Cesa, Risk's technical editor,...
The hybrid saddlepoint method for credit portfolios
Anthony Owen, Alistair McLeod and Kevin Thompson derive a practical analytic approach, which they call the hybrid saddlepoint method, to calculate the credit loss distribution for a heterogeneous portfolio of correlated obligors
Accelerated ensemble Monte Carlo simulation
Traditional vanilla methods of Monte Carlo simulation can be extremely time-consuming if accurate estimation of the loss distribution is required. Kevin Thompson and Alistair McLeod show that the ensemble Monte Carlo method, introduced here, significantly...
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