Technical paper/Credit risk
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, and…
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,…
Being two-faced over counterparty credit risk
A recent trend in quantifying counterparty credit risk for over-the-counter derivatives has involved taking into account the bilateral nature of the risk so that an institution would consider their counterparty risk to be reduced in line with their own…
Un modello di Vasicek multistato con correlazione tra tassi di default e perdita
Approfondimenti - Rischio di credito
A multi-state Vasicek model for correlated default rate and loss severity
Correlation between default and recovery has an important bearing on credit risk capital. Here, Rahul Sen shows that the effect can be modelled efficiently by allowing multiple loss states in the Vasicek framework. Heavy-tailed distributions result for…
Estimating credit contagion in a standard factor model
State-of-the-art credit risk portfolio models and the new Basel capital Accord consider only symmetric dependencies between borrowers in a portfolio, such as correlations. Recently, asymmetric dependencies have been introduced by Davis & Lo (2001), among…
A multi-state Vasicek model for correlated default rate and loss severity
Correlation between default and recovery has a major bearing on credit risk capital. Rahul Sen shows the effect can be modelled efficiently by allowing multiple loss states in the Vasicek framework. Heavy-tailed distributions result for arbitrary loss…
Das Kontrahentenrisiko und CCDSs unter Korrelation
Der Neueste Stand - Hybrid-Risiko
A multi-state Vasicek model for correlated default rate and loss severity
Correlation between default and recovery has an important bearing on credit risk capital. Here, Rahul Sen shows that the effect can be modelled efficiently by allowing multiple loss states in the Vasicek framework. Heavy-tailed distributions result for…
Confidence intervals for corporate default rates
Rating agency default studies provide estimates of mean default rates over multiple time horizons but have never included estimates of the standard errors of the estimates. This is due, at least in part, to the challenge of accounting for the high degree…
Valuing CDOs of ABSs
Charles Smithson and Neil Pearson discuss the valuation of collateralised debt obligations (CDOs), with a close look at CDOs of subprime residential mortage-backed securities
Confidence intervals for corporate default rates
Rating agency default studies provide estimates of mean default rates over multiple time horizons but have never included estimates of the standard errors of the estimates. This is due at least in part to the challenge of accounting for the high degree…
Kalibrierung der Laufzeitstrukturen der Ausfallwahrscheinlichkeiten
Der Neueste Stand: Kreditrisiko
The probability approach to default probabilities
Default estimation for low-default portfolios has attracted attention as banks contemplate the requirements of Basel II's internal ratings-based rules. Here, Nicholas Kiefer applies the probability approach to uncertainty and modelling to default…
Uncovering PD/LGD liaisons
Francisco Sanchez, Roland Ordovas, Elena Martinez and Manuel Vega consider the presence of correlation between default and recovery through the familiar variance of loss formula. Business cycle dependence permits a neat decomposition of the variance…
Calibration of PD term structures: to be Markov or not to be
A common discussion in credit risk modelling is the question of whether term structures of default probabilities can be satisfactorily modelled by Markov chain techniques. Christian Bluhm and Ludger Overbeck show that empirical multi-year default…
The probability approach to default probability
Cutting Edge: Credit portfolio risk
Going downturn
There is much debate regarding the definition of 'downturn' loss given default (LGD). In this article, Michael Barco offers an analytic approach for calculating downturn LGD so that credit risk capital is not underestimated or overestimated
Going downturn
There is much debate regarding the definition of 'downturn' loss given default (LGD). In this article, Michael Barco offers an analytic approach for calculating downturn LGD so that credit risk capital is not underestimated or overestimated
The underlying dynamics of credit correlations
Research Papers