Related papers: Default clustering in large portfolios: Typical ev…
The current research on credit risk is primarily focused on modeling default probabilities. Recovery rates are often treated as an afterthought; they are modeled independently, in many cases they are even assumed constant. This is despite…
We propose a credit risk model for portfolios composed of green and brown loans, extending the ASRF framework via a two-factor copula structure. Systematic risk is modeled using potentially skewed distributions, allowing for asymmetric…
We describe the cluster of large deviations events that arise when one such large deviations event occurs. We work in the framework of an infinite moving average process with a noise that has finite exponential moments.
This study proposes a stochastic model for loss-given-default (LGD) which provides the LGD distribution based on credit market and company-specific financial conditions. The model utilizes last passage time of a linear diffusion…
Credit scoring is an essential tool used by global financial institutions and credit lenders for financial decision making. In this paper, we introduce a new method based on Gaussian Mixture Model (GMM) to forecast the probability of…
Credit risk stress testing has become an important risk management device which is used both by banks internally and by regulators. Stress testing is complex because it essentially means projecting a bank's full balance sheet conditional on…
The DebtRank algorithm has been increasingly investigated as a method to estimate the impact of shocks in financial networks, as it overcomes the limitations of the traditional default-cascade approaches. Here we formulate a dynamical…
We study the collective behaviour of an ensemble of coupled motile elements whose interactions depend on time and are alternatively attractive or repulsive. The evolution of interactions is driven by individual internal variables with…
Within the framework of maximum entropy principle we show that the finite-size long-range Ising model is the adequate model for the description of homogeneous credit portfolios and the computation of credit risk when default correlations…
A clearing member of a Central Counterparty (CCP) is exposed to losses on their default fund and initial margin contributions. Such losses can be incurred whenever the CCP has insufficient funds to unwind the portfolio of a defaulting…
This paper generalizes Moody's correlated binomial default distribution for homogeneous (exchangeable) credit portfolio, which is introduced by Witt, to the case of inhomogeneous portfolios. As inhomogeneous portfolios, we consider two…
The question of how to stabilize financial systems has attracted considerable attention since the global financial crisis of 2007-2009. Recently, Beale et al. ("Individual versus systemic risk and the regulator's dilemma", Proc Natl Acad…
Motivated by examples from extreme value theory we introduce the general notion of a cluster process as a limiting point process of returns of a certain event in a time series. We explore general invariance properties of cluster processes…
For credit risk management purposes in general, and for allocation of regulatory capital by banks in particular (Basel II), numerical assessments of the credit-worthiness of borrowers are indispensable. These assessments are expressed in…
A novel procedure is presented for the objective comparison and evaluation of a bank's decision rules in optimising the timing of loan recovery. This procedure is based on finding a delinquency threshold at which the financial loss of a…
First passage models, where corporate assets undergo a random walk and default occurs if the assets fall below a threshold, provide an attractive framework for modeling the default process. Recently such models have been generalized to…
We study large deviation probabilities for a sum of dependent random variables from a heavy-tailed factor model, assuming that the components are regularly varying. We identify conditions where both the factor and the idiosyncratic terms…
In structural credit risk models, default events and the ensuing losses are both derived from the asset values at maturity. Hence it is of utmost importance to choose a distribution for these asset values which is in accordance with…
The Constant Elasticity of Variance (CEV) model is mathematically presented and then used in a Credit-Equity hybrid framework. Next, we propose extensions to the CEV model with default: firstly by adding a stochastic volatility diffusion…
In this paper we consider a utility maximization problem with defaultable stocks and looping contagion risk. We assume that the default intensity of one company depends on the stock prices of itself and other companies, and the default of…