Related papers: Modelling Correlations in Portfolio Credit Risk

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…

Credit risk in the China's bond market has become increasingly evident, creating a progressively escalating risk of default for credit bond investors. Given the current incomplete and inaccurate bond information disclosure, timely tracking…

This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility of correlated defaults. Under fairly general assumptions for the distribution of the total net…

Growth-optimal portfolios are guaranteed to accumulate higher wealth than any other investment strategy in the long run. However, they tend to be risky in the short term. For serially uncorrelated markets, similar portfolios with more…

In recent years research on credit risk modelling has mainly focused on default probabilities. Recovery rates are usually modelled independently, quite often they are even assumed constant. Then, however, the structural connection between…

Machine learning plays an essential role in preventing financial losses in the banking industry. Perhaps the most pertinent prediction task that can result in billions of dollars in losses each year is the assessment of credit risk (i.e.,…

Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between…

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…

In this paper we propose a copula contagion mixture model for correlated default times. The model includes the well known factor, copula, and contagion models as its special cases. The key advantage of such a model is that we can study the…

We introduce a model for the loss distribution of a credit portfolio considering a contagion mechanism for the default of names which is the result of two independent components: an infection attempt generated by defaulting entities and a…

Credit default poses significant challenges to financial institutions and consumers, resulting in substantial financial losses and diminished trust. As such, credit default risk management has been a critical topic in the financial…

We present a multilayer network model for credit risk assessment. Our model accounts for multiple connections between borrowers (such as their geographic location and their economic activity) and allows for explicitly modelling the…

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 compare observed corporate cumulative default probabilities to those calculated using a stochastic model based on an extension of the work of Black and Cox and find that corporations default as if via diffusive dynamics. The model, based…

We theorize the financial health of a company and the risk of its default. A company is financially healthy as long as its equilibrium in the financial system is maintained, which depends on the cost attributable to the probability that…

This chapter reviews key contributions of complexity science to the study of systemic risk in financial systems. The focus is on network models of financial contagion, where I explore various mechanisms of shock propagation, such as…

Interbank contagion can theoretically exacerbate losses in a financial system and lead to additional cascade defaults during downturn. In this paper we produce default analysis using both regression and neural network models to verify…

The question of how to stabilize financial systems has attracted considerable attention since the global financial crisis of 2007-2009. Recently, Beale et al. ("Individual versus systemic risk and the regulator's dilemma", Proc Natl Acad…

There exists a range of different models for estimating and simulating credit risk transitions to optimally manage credit risk portfolios and products. In this chapter we present a Coupled Markov Chain approach to model rating transitions…

This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American…