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 style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value ...

We present discrete time survival models of borrower default for credit cards that include behavioural data about credit card holders and macroeconomic conditions across the credit card lifetime. We find that dynamic models which include these behavioural and macroeconomic variables provide statistically significant improvements in model fit, which translate into better forecasts of default at ...

Nowadays, one of the most important topics in risk management of banks, financial, and credit institutions is credit risk management. In this research, the researchers used survival analytic methods for credit risk modeling in terms of the conditional distribution function of default time. As a practical task, the authors considered the reward credit portfolio of Tose'e Ta'avon Bank of Guilan P...

In this paper we present a modelling framework for portfolio credit risk which incorporates the dependence between risk-free interest-rates and the default loss process. The contribution in this approach is that – besides the traditional diffusionbased covariation between loss intensities and interest-rates – a direct dependence between interest-rates and the loss process is allowed, in particu...

The determination of future credit loss distributions constitutes a fundamental challenge in many credit risk applications such as the calculation of economic and regulatory capital as well as the pricing of loans, portfolios or derivatives thereof. Currently, best practice is to assume a one-year risk horizon for the derivation of the credit loss distribution. However, the maturities of most c...

A new type of hybrid loan in Taiwan consists of a traditional residential mortgage with an attached line of credit. Motivated by declines in Taiwanese property values and unexpected credit losses on all types of loans secured by residential real estate, we developed new statistical models for analyzing the credit risk on traditional mortgages, the hybrid loans, and pure equity lines of credit. ...

We investigate default probabilities and default correlations of Merton-type credit portfolio models in stress scenarios where a common risk factor is truncated. The analysis is performed in the class of elliptical distributions, a family of light-tailed to heavy-tailed distributions encompassing many distributions commonly found in financial modelling. It turns out that the asymptotic limit of...

While the benefits of bank financing are relatively well understood, the costs are not. This paper argues that while informed banks make flexible financial decisions which prevent a firm's projects from going awry, the cost of this credit is that banks have bargaining power over the firm's profits, once projects have begun. The firm's portfolio choice of borrowing source and the choice of prior...

The asymptotic single risk factor (ASRF) approach is a simplified framework for determining regulatory capital charges for credit risk and has become an integral part of how credit risk capital requirements are to be determined under the second Basel Accord. Within this approach, a key regulatory parameter is the average asset correlation. In this paper, we examine the empirical relationship be...

We model 1927–1997 U.S. business failure rates using a time series approach based on unobserved components. Clear evidence is found of cyclical behavior in default rates. The cycle has a period of around 10 years. We also detect longer term movements in default probabilities and default correlations. Our findings have important implications for portfolio credit risk analysis. First, a static an...