Related papers: Spurious Default Probability Projections in Credit…
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…
Value at Risk (VaR) and stress testing are two of the most widely used approaches in portfolio risk management to estimate potential market value losses under adverse market moves. VaR quantifies potential loss in value over a specified…
Supply chain disruptions constitute an often underestimated risk for financial stability. As in financial networks, systemic risks in production networks arises when the local failure of one firm impacts the production of others and might…
Reliable estimation of feature contributions in machine learning models is essential for trust, transparency and regulatory compliance, especially when models are proprietary or otherwise operate as black boxes. While permutation-based…
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…
We report a study of a stylized banking cascade model investigating systemic risk caused by counter party failure using liabilities and assets to define banks' balance sheet. In our stylized system, banks can be in two states: normally…
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…
We develop a novel stress-test framework to monitor systemic risk in financial systems. The modular structure of the framework allows to accommodate for a variety of shock scenarios, methods to estimate interbank exposures and mechanisms of…
The instability of the financial system as experienced in recent years and in previous periods is often linked to credit defaults, i.e., to the failure of obligors to make promised payments. Given the large number of credit contracts, this…
The lifetime behaviour of loans is notoriously difficult to model, which can compromise a bank's financial reserves against future losses, if modelled poorly. Therefore, we present a data-driven comparative study amongst three techniques in…
We investigate the impact of available information on the estimation of the default probability within a generalized structural model for credit risk. The traditional structural model where default is triggered when the value of the firm's…
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…
As it is known in the finance risk and macroeconomics literature, risk-sharing in large portfolios may increase the probability of creation of default clusters and of systemic risk. We review recent developments on mathematical and…
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…
Systemic risk is concerned with the instability of a financial system whose members are interdependent in the sense that the failure of a few institutions may trigger a chain of defaults throughout the system. Recently, several systemic…
We propose a novel credit default model that takes into account the impact of macroeconomic information and contagion effect on the defaults of obligors. We use a set-valued Markov chain to model the default process, which is the set of all…
Credit scorecards are models used for the modelling of the probability of default of clients. The decision to extend credit to an applicant, as well as the price of the credit, is often based on these models. In order to ensure that…
The interconnectedness of financial institutions affects instability and credit crises. To quantify systemic risk we introduce here the PD model, a dynamic model that combines credit risk techniques with a contagion mechanism on the network…
In risk management it is desirable to grasp the essential statistical features of a time series representing a risk factor. This tutorial aims to introduce a number of different stochastic processes that can help in grasping the essential…