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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…
Since the Great Financial Crisis (GFC), the use of stress tests as a tool for assessing the resilience of financial institutions to adverse financial and economic developments has increased significantly. One key part in such exercises is…
The multivariate conditional probability distribution models the effects of a set of variables onto the statistical properties of another set of variables. In the study of systemic risk in a financial system, the multivariate conditional…
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…
We present an econometric framework that adapts tools for scenario analysis, such as variants of conditional forecasts and generalized impulse responses, for use with dynamic nonparametric models. The proposed algorithms are based on…
In this paper, we present a methodology for measuring the impact of scenarios on the expected losses of exposures by leveraging the existing provisioning infrastructure within financial institutions, where scenario effects are captured…
In this article, we consider models for time-to-event data obtained from experiments in which stress levels are altered at intermediate stages during the observation period. These experiments, known as step-stress tests, belong to the…
Markov processes are used in a wide range of disciplines, including finance. The transition densities of these processes are often unknown. However, the conditional characteristic functions are more likely to be available, especially for…
Stress testing refers to the application of adverse financial or macroeconomic scenarios to a portfolio. For this purpose, financial or macroeconomic risk factors are linked with asset returns, typically via a factor model. We expand the…
We develop a general approach for stress testing correlations of financial asset portfolios. The correlation matrix of asset returns is specified in a parametric form, where correlations are represented as a function of risk factors, such…
Tracking the build-up of financial vulnerabilities is a key component of financial stability policy. Due to the complexity of the financial system, this task is daunting, and there have been several proposals on how to manage this goal. One…
Using particle system methodologies we study the propagation of financial distress in a network of firms facing credit risk. We investigate the phenomenon of a credit crisis and quantify the losses that a bank may suffer in a large credit…
We introduce a class of continuous-time bivariate phase-type distributions for modeling dependencies from common shocks. The construction uses continuous-time Markov processes that evolve identically until an internal common-shock event,…
In this work, we explore the possibility of utilizing transfer learning techniques to address the financial portfolio optimization problem. We introduce a novel concept called "transfer risk", within the optimization framework of transfer…
We set up a structural model to study credit risk for a portfolio containing several or many credit contracts. The model is based on a jump--diffusion process for the risk factors, i.e. for the company assets. We also include correlations…
The concepts of probability, statistics and stochastic theory are being successfully used in structural engineering. Markov Chain modelling is a simple stochastic process model that has found its application in both describing stochastic…
The instability of historical risk factor correlations renders their use in estimating portfolio risk extremely questionable. In periods of market stress correlations of risk factors have a tendency to quickly go well beyond estimated…
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,…
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…
As an important tool in financial risk management, stress testing aims to evaluate the stability of financial portfolios under some potential large shocks from extreme yet plausible scenarios of risk factors. The effectiveness of a stress…