Systematic risk factors redefined

Credit risk factor models tend to have a narrow focus on the Gaussian case, use copula functions that don’t work well with the martingale methods used in pricing, and can introduce arbitrage. Dariusz Gatarek and Juliusz Jablecki show how an increasing sequence of default times can be used to create systematic factors that allow for a rich correlation structure – and keep strong links with pricing


The credit valuation adjustment (CVA) that is added to derivatives prices to reflect the risk of the counterparty’s default is a particularly visible example of the need for the dependence between market and credit risks to be captured consistently. Because it is calculated on a netting set basis, large quantities of assets must be simulated simultaneously, with a dependence structure capturing their joint distribution – and that of their default times.

Systematic risk factors redefined

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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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