Related papers: Linear Credit Risk Models
We analyse time series of CDS spreads for a set of major US and European institutions on a pe- riod overlapping the recent financial crisis. We extend the existing methodology of {\epsilon}-drawdowns to the one of joint {\epsilon}-drawups,…
According to theoretical models of valuing risky corporate securities, risk of default is primary component in overall yield spread. However, sizable empirical literature considers it otherwise by giving more importance to non-default risk…
Recently, incomplete-market techniques have been used to develop a model applicable to credit default swaps (CDSs) with results obtained that are quite different from those obtained using the market-standard model. This article makes use of…
Risk-averse investors often wish to exclude stocks from their portfolios that bear high credit risk, which is a measure of a firm's likelihood of bankruptcy. This risk is commonly estimated by constructing signals from quarterly accounting…
Systemic risk is a rapidly developing area of research. Classical financial models often do not adequately reflect the phenomena of bubbles, crises, and transitions between them during credit cycles. To study very improbable events,…
We study insolvency cascades in an interbank system when banks are allowed to insure their loans with credit default swaps (CDS) sold by other banks. We show that, by properly shifting financial exposures from one institution to another, a…
Credit Value Adjustment (CVA) is the difference between the value of the default-free and credit-risky derivative portfolio, which can be regarded as the cost of the credit hedge. Default probabilities are therefore needed, as input…
Credit Default Swaps (CDS) on a reference entity may be traded in multiple currencies, in that protection upon default may be offered either in the domestic currency where the entity resides, or in a more liquid and global foreign currency.…
We develop a finite horizon continuous time market model, where risk averse investors maximize utility from terminal wealth by dynamically investing in a risk-free money market account, a stock written on a default-free dividend process,…
We propose a new model for pricing Quanto CDS and risky bonds. The model operates with four stochastic factors, namely: hazard rate, foreign exchange rate, domestic interest rate, and foreign interest rate, and also allows for…
In this paper, we analyze the diversity of term structure functions (e.g., yield curves, swap curves, credit curves) constructed in a process which complies with some admissible properties: arbitrage-freeness, ability to fit market quotes…
We introduce a novel machine learning model for credit risk by combining tree-boosting with a latent spatio-temporal Gaussian process model accounting for frailty correlation. This allows for modeling non-linearities and interactions among…
We develop a multi-curve term structure setup in which the modelling ingredients are expressed by rational functionals of Markov processes. We calibrate to LIBOR swaptions data and show that a rational two-factor lognormal multi-curve model…
We extend the now classic structural credit modeling approach of Black and Cox to a class of "two-factor" models that unify equity securities such as options written on the stock price, and credit products like bonds and credit default…
The hypothesis that committed revolving credit lines with fixed spreads can provide firms with interest rate insurance is a standard feature of models on these credit facilities' interest rate structure. Nevertheless, this hypothesis has…
This work focuses on financial risks from a probabilistic point of view. The value of a firm is described as a geometric Brownian motion and default emerges as a first passage time event. On the technical side, the critical threshold that…
This paper presents PDx, an adaptive, machine learning operations (MLOps) driven decision system for forecasting credit risk using probability of default (PD) modeling in digital lending. While conventional PD models prioritize predictive…
The utility-based pricing of defaultable bonds in the case of stochastic intensity models of default risk is discussed. The Hamilton-Jacobi- Bellman (HJB) equations for the value functions is derived. A finite difference method is used to…
Individual risk models need to capture possible correlations as failing to do so typically results in an underestimation of extreme quantiles of the aggregate loss. Such dependence modelling is particularly important for managing credit…
Evaluating the financial performance of manufacturing firms requires consideration of both the time value of money and the relative importance of multiple decision criteria. Conventional approaches relying solely on deterministic…