Results from portfolio models for credit risk tell us that loan concentration in certain industry sectors can substantially increase the value-at-risk (V aR). The purpose of this paper is to analyse if a very tractable “infection model” can provide a meaningful estimate of the impact of concentration risk on the V aR. This would be achieved with quite parsimonious data requirements, which are c...

I compare the Bush-Paulson plan of intervention in secondary markets for mortgage-backed securities (MBS) with an alternative based on insuring mortgages directly. Fully insuring mortgages achieves the same bottom-line effect as buying all outstanding MBS but instantaneously with no upfront costs. A plan based on partial insurance can match most effects of a partial Paulson-style intervention. ...

We propose a two-stage model for dealing with the temporal degradation of credit scoring models. First, we develop a model from a classical framework, with a static supervised learning setting and binary output. Then, we introduce the time-changing economic factors, using a regression between the macroeconomic data and the internal default in the portfolio. In so doing, the specific risk is cap...

Quantitative rating systems are increasingly being used for the purposes of capital allocation and pricing credits. For these purposes, it is important to validate the accuracy of the probability of default (PD) estimates generated by the rating system and not merely focus on evaluating the discriminatory power of the system. The validation of the accuracy of the PD quantification has been a ch...

Estimation of risk of the large portfolios of credit risky securities is the problem that can be studied using Monte Carlo methods. The main difficulties include the large number of risk factors (interest rates, fx rates, ...) and statistical dependencies between probabilities of default and market risk factors. There are several variance reduction techniques (importance sampling, stratifies sa...

The multivariate modeling of default risk is a crucial aspect of the pricing of credit derivative products referencing a portfolio of underlying assets, and the evaluation of Value at Risk of such portfolios. This paper proposes a model for the joint dynamics of credit ratings of several firms. Namely, individual credit ratings are modeled by univariate continuous time Markov chain, while their...

M Carlo simulation is widely used to measure the credit risk in portfolios of loans, corporate bonds, and other instruments subject to possible default. The accurate measurement of credit risk is often a rare-event simulation problem because default probabilities are low for highly rated obligors and because risk management is particularly concerned with rare but significant losses resulting fr...

We consider a financial market with a stock exposed to a counterparty risk inducing a drop in the price, and which can still be traded after this default time. We use a default-density modeling approach, and address in this incomplete market context the expected utility maximization from terminal wealth. We show how this problem can be suitably decomposed in two optimization problems in complet...