Related papers: Efficient Exponential Tilting for Portfolio Credit…
We introduce a new method to calculate the credit exposure of European and path-dependent options. The proposed method is able to calculate accurate expected exposure and potential future exposure profiles under the risk-neutral and the…
Copulas have become an important tool in the modern best practice Enterprise Risk Management, often supplanting other approaches to modelling stochastic dependence. However, choosing the `right' copula is not an easy task, and the…
Model approximations are common practice when estimating structural or quasi-structural models. The paper considers the econometric properties of estimators that utilize projections to reimpose information about the exact model in the form…
In this note we study the numerical stability problem that may take place when calculating the cumulative distribution function of the {\it Hypoexponential} random variable. This computation is extensively used during the execution of Monte…
We introduce a dynamic model of the default waterfall of derivatives CCPs and propose a risk sensitive method for sizing the initial margin (IM), and the default fund (DF) and its allocation among clearing members. Using a Markovian…
We analyze the fluctuation of the loss from default around its large portfolio limit in a class of reduced-form models of correlated firm-by-firm default timing. We prove a weak convergence result for the fluctuation process and use it for…
We study a simple, solvable model that allows us to investigate effects of credit contagion on the default probability of individual firms, in both portfolios of firms and on an economy wide scale. While the effect of interactions may be…
In this paper, we propose a method that provides a useful technique to compare relationship between risks involved that takes customer become defaulter and debt collection process that might make this defaulter recovered. Through estimation…
Utility based methods provide a very general theoretically consistent approach to pricing and hedging of securities in incomplete financial markets. Solving problems in the utility based framework typically involves dynamic programming,…
Risk management is an important practice in the banking industry. In this paper we develop a new methodology to estimate and predict the probability of default (PD) based on the rating transition matrices, which relates the rating…
The distribution of the sum of dependent risks is a crucial aspect in actuarial sciences, risk management and in many branches of applied probability. In this paper, we obtain analytic expressions for the probability density function (pdf)…
In this paper we consider the problem of computing tail probabilities of the distribution of a random sum of positive random variables. We assume that the individual variables follow a reproducible natural exponential family (NEF)…
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…
The potential for cascading failure in power systems adds substantially to overall reliability risk. Monte Carlo sampling can be used with a power system model to estimate this impact, but doing so is computationally expensive. This paper…
This study deals with the pricing and hedging of single-tranche collateralized debt obligations (STCDOs). We specify an affine two-factor model in which a catastrophic risk component is incorporated. Apart from being analytically tractable,…
This paper provides an introductory overview of how one may employ importance sampling effectively as a tool for solving stochastic optimization formulations incorporating tail risk measures such as Conditional Value-at-Risk. Approximating…
We propose a method for the accurate estimation of rare event or failure probabilities for expensive-to-evaluate numerical models in high dimensions. The proposed approach combines ideas from large deviation theory and adaptive importance…
Using Monte Carlo simulation to calculate the Value at Risk (VaR) as a possible risk measure requires adequate techniques. One of these techniques is the application of a compound distribution for the aggregates in a portfolio. In this…
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…
A new test for measuring the accuracy of financial market risk estimations is introduced. It is based on the probability integral transform (PIT) of the ex post realized returns using the ex ante probability distributions underlying the…