Dynamic frailties and credit portfolio modelling

Martin Delloye, Jean-David Fermanian and Mohammed Sbai estimate and discuss a reduced-form credit portfolio model in a proportional hazard framework. They propose an innovative method of generating flexible amounts of dependence between underlying defaults by introducing unobservable dynamic common explanatory variables, called dynamic frailties

Credit portfolio models are key tools for portfolio credit risk management, for economic capital calculations and for providing relevant inputs for Basel II regulatory requirements. Moreover, they can be used as pricing models for collateralised debt obligations (CDOs) and basket derivatives.

Intuitively, it is well understood that default probabilities and rating transitions are influenced by macroeconomic variables. Our goal is to model every rating transition simultaneously in a consistent

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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