Related papers: Efficient estimation of default correlation for mu…
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…
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…
This study contributes to understanding Valuation Adjustments (xVA) by focussing on the dynamic hedging of Credit Valuation Adjustment (CVA), corresponding Profit & Loss (P&L) and the P&L explain. This is done in a Monte Carlo simulation…
We present an analytic solution of a differential-difference equation that appears when one solves an optimal stopping time problem with state process following a jump-diffusion process. This equation occurs in the context of real options…
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 the paper we study dynamics of the arbitrage prices of credit default swaps within a hazard process model of credit risk. We derive these dynamics without postulating that the immersion property is satisfied between some relevant…
A new procedure is presented for the objective comparison and evaluation of default definitions. This allows the lender to find a default threshold at which the financial loss of a loan portfolio is minimised, in accordance with Basel II.…
It is generally accepted that the asset price processes contain jumps. In fact, pure jump models have been widely used to model asset prices and/or stochastic volatilities. The question is: is there any statistical evidence from the…
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…
We solve the first-passage problem for the Heston random diffusion model. We obtain exact analytical expressions for the survival and hitting probabilities to a given level of return. We study several asymptotic behaviors and obtain…
This paper examines the problem of pricing spread options under some models with jumps driven by Compound Poisson Processes and stochastic volatilities in the form of Cox-Ingersoll-Ross(CIR) processes. We derive the characteristic function…
A direct method for calculating default rates by industry and target corporate segments is not possible given the lack of statistical data. The proposed paper considers a model for filtering the dynamics of the probability of default 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…
How to forecast next year's portfolio-wide credit default rate based on last year's default observations and the current score distribution? A classical approach to this problem consists of fitting a mixture of the conditional score…
Excessive leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be…
Predicting potential credit default accounts in advance is challenging. Traditional statistical techniques typically cannot handle large amounts of data and the dynamic nature of fraud and humans. To tackle this problem, recent research has…
Filiz et al. (2008) proposed a model for the pattern of defaults seen among a group of firms at the end of a given time period. The ingredients in the model are a graph, where the vertices correspond to the firms and the edges describe the…
A simple graphical model for correlated defaults is proposed, with explicit formulas for the loss distribution. Algebraic geometry techniques are employed to show that this model is well posed for default dependence: it represents any given…
In this paper, our focus lies on the Merton's jump diffusion model, employing jump processes characterized by the compound Poisson process. Our primary objective is to forecast the drift and volatility of the model using a variety of…
In this paper we consider an ergodic diffusion process with jumps whose drift coefficient depends on $\mu$ and volatility coefficient depends on $\sigma$, two unknown parameters. We suppose that the process is discretely observed at the…