Related papers: Sovereign Default Risk and Uncertainty Premia
We develop a generalization of the Black-Cox structural model of default risk. The extended model captures uncertainty related to firm's ability to avoid default even if company's liabilities momentarily exceeding its assets. Diffusion in a…
In our model, private actors with interbank cash flows similar to, but nore general than (Carmona, Fouque, Sun, 2013) borrow from the outside economy at a certain interest rate, controlled by the central bank, and invest in risky assets.…
This paper develops a two-dimensional structural framework for valuing credit default swaps and corporate bonds in the presence of default contagion. Modelling the values of related firms as correlated geometric Brownian motions with…
Mortgage default rates, on the one hand, serve as a measure of economic health to support decision-making by insurance companies, and on the other hand, is a key risk factor in the asset-liability management (ALM) practice, as mortgage…
Prepayment risk embedded in fixed-rate mortgages forms a significant fraction of a financial institution's exposure, and it receives particular attention because of the magnitude of the underlying market. The embedded prepayment option…
This paper develops a dynamic monetary model to study the (in)stability of the fractional reserve banking system. The model shows that the fractional reserve banking system can endanger stability in that equilibrium is more prone to exhibit…
We theorize the financial health of a company and the risk of its default. A company is financially healthy as long as its equilibrium in the financial system is maintained, which depends on the cost attributable to the probability that…
The authors examine the concept of probability of default for asset-backed loans. In contrast to unsecured loans it is shown that probability of default can be defined as either a measure of the likelihood of the borrower failing to make…
In this paper, we deal with an axiomatic approach to default risk. We introduce the notion of a default risk measure, which generalizes the classical probability of default (PD), and allows to incorporate model risk in various forms. We…
This paper considers mutual obligations in the interconnected bank system and analyzes their influence on joint and marginal survival probabilities as well as CDS and FTD prices for the individual banks. To make the role of mutual…
While defaults are rare events, losses can be substantial even for credit portfolios with a large number of contracts. Therefore, not only a good evaluation of the probability of default is crucial, but also the severity of losses needs to…
We propose a model which can be jointly calibrated to the corporate bond term structure and equity option volatility surface of the same company. Our purpose is to obtain explicit bond and equity option pricing formulas that can be…
Model uncertainty is a type of inevitable financial risk. Mistakes on the choice of pricing model may cause great financial losses. In this paper we investigate financial markets with mean-volatility uncertainty. Models for stock markets…
In this article we consider the parameter risk in the context of internal modelling of the reserve risk under Solvency II. We discuss two opposed perspectives on parameter uncertainty and point out that standard methods of classical…
Intuitively, the default risk of a single borrower is higher when her or his assets and debt are denominated in different currencies. Additionally, the default dependence of borrowers with assets and debt in different currencies should be…
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 investor is interested in the expected return and he is also concerned about the risk and the uncertainty assumed by the investment. One of the most popular concepts used to measure the risk and the uncertainty is the variance and/or…
We compare two models of corporate default by calculating the Jeffreys-Kullback-Leibler divergence between their predicted default probabilities when asset correlations are either high or low. Our main results show that the divergence…
We propose two structural models for stochastic losses given default which allow to model the credit losses of a portfolio of defaultable financial instruments. The credit losses are integrated into a structural model of default events…
The aim of this paper is to quantify and manage systemic risk caused by default contagion in the interbank market. We model the market as a random directed network, where the vertices represent financial institutions and the weighted edges…