Technical paper/Default risk
Estimating default correlations using a reduced-form model
Credit risk : Cuttingedge
Maximum likelihood estimate of default correlations
Estimating asset correlations is difficult in practice since there is little available data andmany parameters have to be found. Paul Demey, Jean-Frédéric Jouanin, Céline Roget andThierry Roncalli present a tractable version of the multi-factor Merton…
Mixed default modelling
Structural and reduced-form models are two well-established approaches to modelling afirm’s default risk. Here, Li Chen, Damir Filipovic/ and Vincent Poor develop a new default riskmodelling strategy based on combining these two frameworks in order to…
The score for credit
Jorge Sobehart and Sean Keenan discuss the benefits and limitations of model performance measures for default and credit spread prediction, and highlight several common pitfalls in the model comparison found in the literature and vendor documentation. To…
Collateral damage
Credit risk
Correlation evidence
Like ratings, default correlation is an area of fierce industry debate. But any fundamental, long-terminvestor searching for fair value in credit correlation will want to understand what the historical dataactually says.
Correlation evidence
Like ratings, default correlation is an area of fierce industry debate. But any fundamental, long-term investor searching for fair value in credit correlation will want to understand what the historical data actually says. Here, Arnaud de Servigny and…
The road to partition
Applying the ensemble approach developed in these pages last month, Kevin Thompson and Roland Ordovas calculate risk contributions and show how to measure higher-order default dependence using the method of partitions. The results provide tools allowing…
Credit ensemble
Kevin Thompson and Roland Ordovas address the question of how individual counterparties contribute to the total credit risk of a portfolio. They provide an analytic method, new to credit modelling, to estimate all joint default statistics conditional…
Loan portfolio value
Using a conditional independence framework, Oldrich Vasicek derives a useful limiting form for the portfolio loss distribution with a single systematic factor. He then derives a risk-neutral distribution suitable for traded portfolios, and shows how…
The need for hybrid models
In response to the above article, the authors argue that pure firm-value approaches to default prediction are fundamentally flawed.?
Predictive Merton models
Do default indicators such as agency ratings improve upon the predictive power of KMV’s proprietary default prediction methodology?
Pricing default baskets
Nicholas Dunbar, Risk’s technical editor, introduces the first in a new series of technical papers written by quants at Deutsche Bank.“Default correlation has been one of the hottest topics in credit derivatives over the past year. So it is a pleasure to…
Equity to credit pricing
Default models
Probing granularity
The granularity adjustment, which adjusts risk weightings for credit portfolio diversification, is one of Basel II’s key modelling assumptions. Here, Tom Wilde uncovers a weakness in this assumption arising from the differences in the underlying credit…
How dependent are defaults?
Credit portfolio management
Modelling default correlation
Credit risk
Depressing recoveries
Credit risk
HJM with multiples
Term structure of credit
The price of credit
Masterclass – with JP Morgan
Integrating correlations
Credit risk