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It is a well known fact that recovery rates tend to go down when the number of defaults goes up in economic downturns. We demonstrate how the loss given default model with the default and recovery dependent via the latent systematic risk…
Model risk has a huge impact on any risk measurement procedure and its quantification is therefore a crucial step. In this paper, we introduce three quantitative measures of model risk when choosing a particular reference model within a…
The valuation of counterparty risk for single name credit derivatives requires the computa- tion of joint distributions of default times of two default-prone entities. For a Merton-type model, we derive some formulas for these joint…
The study of systemic risk is often presented through the analysis of several measures referring to quantities used by practitioners and policy makers. Almost invariably, those measures evaluate the size of the impact that exogenous events…
This paper presents a new model for pricing financial derivatives subject to collateralization. It allows for collateral arrangements adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized…
As they play an increasingly important role in determining access to credit, credit scoring models are under growing scrutiny from banking supervisors and internal model validators. These authorities need to monitor the model performance…
In the peer to peer (P2P) lending platform, investors hope to maximize their return while minimizing the risk through a comprehensive understanding of the P2P market. A low and stable average default rate across all the borrowers denotes a…
Inspired by the double-debt problem in Japan where the mortgagor has to pay the remaining loan even if their house was destroyed by a catastrophic event, we model the lender's cash flow, by an exponential functional of a renewal-reward…
Income verification is the problem of validating a person's stated income given basic identity information such as name, location, job title and employer. It is widely used in the context of mortgage lending, rental applications and other…
Economic models with input-output networks assume that firm or sector (unit) growth is driven by a weighted sum of trade partners' growth and an independently-drawn idiosyncratic shock. I show that the idiosyncratic risk assumption in a…
The importance of adequately modeling credit risk has once again been highlighted in the recent financial crisis. Defaults tend to cluster around times of economic stress due to poor macro-economic conditions, {\em but also} by directly…
Banks in the interbank network can not assess the true risks associated with lending to other banks in the network, unless they have full information on the riskiness of all the other banks. These risks can be estimated by using network…
I develop a tractable adverse-selection model comparing secured bank loans and bonds when both pledge collateral but differ in effective liquidation efficiency. A small wedge in recovery rates generates coexistence, a sharp bank-bond…
Most work in mechanism design assumes that buyers are risk neutral; some considers risk aversion arising due to a non-linear utility for money. Yet behavioral studies have established that real agents exhibit risk attitudes which cannot be…
Because the asset value of a private company does not observable except in quarterly reports, the structural model has not been developed for a private company. For this reason, this paper attempt to develop the Merton's structural model…
We compare observed corporate cumulative default probabilities to those calculated using a stochastic model based on an extension of the work of Black and Cox and find that corporations default as if via diffusive dynamics. The model, based…
An empirical analysis, suggested by optimal Merton dynamics, reveals some unexpected features of asset volumes. These features are connected to traders' belief and risk aversion. This paper proposes a trading strategy model in the optimal…
The estimation of marginal loan write-off probabilities is a non-trivial task when modelling the loss given default (LGD) risk parameter in credit risk. We explore two types of survival models in estimating the overall write-off probability…
A system is considered, which is subject to external and possibly fatal shocks, with dependence between the fatality of a shock and the system age. Apart from these shocks, the system suffers from competing soft and sudden failures, where…
Risk and utility functionals are fundamental building blocks in economics and finance. In this paper we investigate under which conditions a risk or utility functional is sensitive to the accumulation of losses in the sense that any…