Default is a rare event, even in segments in the midrange of a bank’s portfolio. Inference about default rates is essential for risk management and for compliance with the requirements of Basel II. Most commercial loans are in the middle-risk categories and are to unrated companies. Expert information is crucial in inference about defaults. A Bayesian approach is proposed and illustrated using ...

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 ...

Defaults in a credit portfolio of many obligors or in an economy populated with firms tend to occur in waves. This may simply reflect their sharing of common risk factors and/or manifest their systemic linkages via credit chains. One popular approach to characterizing defaults in a large pool of obligors is the Poisson intensity model coupled with stochastic covariates. A constraining feature o...

W develop a model for pricing securities whose value may depend simultaneously on equity, interestrate, and default risks. The framework may also be used to extract probabilities of default (PD) functions from market data. Our approach is entirely based on observables such as equity prices and interest rates, rather than on unobservable processes such as firm value. The model stitches together ...

The expected value of information in a standard portfolio investment problem with ex-post payment can increase when the information is garbled prior to its sale. Distorting the information helps to resolve the incentive problem decreasing the buyer’s default risk and thereby increasing the seller’s expected revenues. D 2004 Elsevier B.V. All rights reserved.

Mixture models play an important role in the modeling of portfolio losses. In these models the risk of default of individual obligors (indexed by i ∈ {1, . . . ,m}) depends on an underlying set of common economic factors, denoted Ψ. Given these factors, the losses due to default li of individual obligors are assumed to be stochastically independent. Dependence between different obligors stems o...

Abstract We analyze the supply-side disruptions associated with COVID-19. find that sectors in which a higher fraction of workforce is not able to work remotely experienced greater declines employment and expected revenue growth, worse stock market performance, likelihood default. The overweights low-exposure industries. Thus, our findings cast light on disconnect between indices aggregate outc...

This paper is part of a series explaining various methodologies for defining and measuring the contributions of systematic factors to economic capital as well as for hedging systematic risk in credit portfolios. Multi-factor credit portfolio models are used widely today for measuring and managing economic capital as well as for pricing credit portfolio instruments such as collateralized debt ob...

Credit risk remains the most significant risk facing financial institutions. An understanding of the drivers of credit risk (i.e. the possibility that a borrower will fail to repay a loan) is therefore a key analytical and practical challenge for lenders. Furthermore, to the extent that on a number of occasions in the past, banking system problems have been largely associated with simultaneous ...

Portfolios are constructed to increase returns and manage risk. In high-risk investment strategies, central measures of risk must be complemented with tail measures of risk. An unanticipated event impacting securities of one firm can contagiously affect those of other firms through a contagion flow process. The connections between firms due to a variety of factors can spread the contagion, and ...