Related papers: Spurious Default Probability Projections in Credit…
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,…
Credit capital requirements in Internal Rating Based approaches require the calibration of two key parameters: the probability of default and the loss-given-default. This letter considers the uncertainty about these two parameters and…
Stress testing poses a causal question: how would portfolio credit losses change if the macroeconomy followed an adverse counterfactual path? Yet standard practice remains predictive and might be therefore vulnerable to omitted-variable…
In the aftermath of the financial crisis, supervisory authorities have considerably altered the mode of operation of financial stress testing. Despite these efforts, significant concerns and extensive criticism have been raised by market…
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…
The importance of adequately modeling credit risk has once again been highlighted in the recent financial crisis. Defaults tend to cluster around times of economic stress due to poor macro-economic conditions, {\em but also} by directly…
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…
Stress testing, and in particular, reverse stress testing, is a prominent exercise in risk management practice. Reverse stress testing, in contrast to (forward) stress testing, aims to find an alternative but plausible model such that under…
An resilience optimal evaluation of financial portfolios implies having plausible hypotheses about the multiple interconnections between the macroeconomic variables and the risk parameters. In this paper, we propose a graphical model for…
In this work, inspired by the Archer-Mouy-Selmi approach, we present two methodologies for scoring the stress test scenarios used by CCPs for sizing their Default Funds. These methodologies can be used by risk managers to compare different…
Macroeconomic factors have a critical impact on banking credit risk, which cannot be directly controlled by banks, and therefore, there is a need for an early credit risk warning system based on the macroeconomy. By comparing different…
Diffusion in a linear potential in the presence of position-dependent killing is used to mimic a default process. Different assumptions regarding transport coefficients, initial conditions, and elasticity of the killing measure lead to…
Cyber-Physical Systems (CPSs) are often safety-critical and deployed in uncertain environments. Identifying scenarios where CPSs do not comply with requirements is fundamental but difficult due to the multidisciplinary nature of CPSs. We…
We consider the problem where a modeller conducts sensitivity analysis of a model consisting of random input factors, a corresponding random output of interest, and a baseline probability measure. The modeller seeks to understand how the…
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…
Banks are required to use long-term default probabilities (PDs) of their portfolios when calculating credit risk capital under internal ratings-based (IRB) models. However, the calibration models and historical data typically reflect…
Stress-strain curves, or more generally, stress functions, are an extremely important characterization of a material's mechanical properties. However, stress functions are often difficult to derive and are narrowly tailored to a specific…
This paper introduces a novel stochastic model for credit spreads. The stochastic approach leverages the diffusion of default intensities via a CIR++ model and is formulated within a risk-neutral probability space. Our research primarily…
This paper presents a convenient framework for modeling default process and pricing derivative securities involving credit risk. The framework provides an integrated view of credit valuation adjustment by linking distance-to-default,…
Because stress is subjective and is expressed differently from one person to another, generic stress prediction models (i.e., models that predict the stress of any person) perform crudely. Only person-specific ones (i.e., models that…