Related papers: Model risk on credit risk
Interbank deposits (loans and credits) are quite common in banking system all over the world. Such interbank co-operation is profitable for banks but it can also lead to collective financial failures. In this paper we introduce a new model…
Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between…
The credit crisis roiling the world's financial markets will likely take years and entire careers to fully understand and analyze. A short empirical investigation of the current trends, however, demonstrates that the losses in certain…
Propagation of balance-sheet or cash-flow insolvency across financial institutions may be modeled as a cascade process on a network representing their mutual exposures. We derive rigorous asymptotic results for the magnitude of contagion in…
Global catastrophic risk events, such as nuclear war, pose a severe threat to the stability of international financial systems. As evidenced by even less severe scenarios like the Great Recession, an economic failure can propagate through…
A two-step contagion model with a single seed serves as a cornerstone for understanding the critical behaviors and underlying mechanism of discontinuous percolation transitions induced by cascade dynamics. When the contagion spreads from a…
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…
We review recent progress in modeling credit risk for correlated assets. We start from the Merton model which default events and losses are derived from the asset values at maturity. To estimate the time development of the asset values, the…
This paper presents a meta-learning framework for credit risk assessment of Italian Small and Medium Enterprises (SMEs) that explicitly addresses the temporal misalignment of credit scoring models. The approach aligns financial statement…
In 2012, JPMorgan accumulated a USD~6.2 billion loss on a credit derivatives portfolio, the so-called `London Whale', partly as a consequence of de-correlations of non-perfectly correlated positions that were supposed to hedge each other.…
Estimating the covariance of asset returns, i.e., the risk model, is a key component of financial portfolio construction and evaluation. Most risk modeling approaches produce a factor model that decomposes the asset variability into two…
Community structure is an important factor in the behavior of real-world networks because it strongly affects the stability and thus the phase transition order of the spreading dynamics. We here propose a reversible social contagion model…
In biological materials, strong binding despite an applied load force is often based on clusters of dynamic bonds that share the load. Different macroscopic behaviors have been described depending on whether the load is shared locally or…
A probabilistic framework is introduced that represents stylized banking networks and aims to predict the size of contagion events. In contrast to previous work on random financial networks, which assumes independent connections between…
This paper provides a general framework for modeling financial contagion in a system with obligations in multiple illiquid assets (e.g., currencies). In so doing, we develop a multi-layered financial network that extends the single network…
This paper develops a dynamic factor model in which common level and volatility factors evolve jointly, allowing conditional means and variances to interact endogenously within a large-information setting. The joint evolution of these…
Frailty models are essential tools in survival analysis for addressing unobserved heterogeneity and random effects in the data. These models incorporate a random effect, the frailty, which is assumed to impact the hazard rate…
Models of threshold driven contagion explain the cascading spread of information, behavior, systemic risk, and epidemics on social, financial and biological networks. At odds with empirical observation, these models predict that…
Banks and financial institutions all over the world manage portfolios containing tens of thousands of customers. Not all customers are high credit-worthy, and many possess varying degrees of risk to the Bank or financial institutions that…
The global crisis of 2008 provoked a heightened interest among scientists to study the phenomenon, its propagation and negative consequences. The process of modelling the spread of a virus is commonly used in epidemiology. Conceptually, the…