We propose two structural models for stochastic loss given default that allow the credit losses of a portfolio of defaultable financial instruments to be modeled. The credit losses are integrated into a structural model of default events accounting for correlations between the default events and the associated losses. We show how the models can be calibrated and analyze the impact of correlatio...

In this paper, we solve the intertemporal investment problem of an investor holding a portfolio of default-free and defaultable bonds. Default-risk is modeled in an intensity based framework with state variables following an a¢ne di¤usion. The structure of the optimal portfolio over time is investigated and compared to the static meanvariance portfolio. Furthermore, we describe the impact of ti...

We present a multi-step model to measure portfolio credit risk that integrates exposure simulation and portfolio credit risk techniques. Thus, it overcomes the major limitation currently shared by portfolio models with derivatives. Specifically, the model is an improvement over current portfolio credit risk models in three main aspects. First, it defines explicitly the joint evolution of market...

We present a multi-step model to measure portfolio credit risk that integrates exposure simulation and portfolio credit risk techniques. Thus, it overcomes the major limitation currently shared by portfolio models with derivatives. Specifically, the model is an improvement over current portfolio credit risk models in three main aspects. First, it defines explicitly the joint evolution of market...

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...

The paper presents a simulation framework for measuring and managing the default risk of a loan portfolio. Through the dependency of counterparty default on a systematic risk factor, we explore the economic capital requirement for a hypothetical credit portfolio. The study employs bivariate standard normal distribution for mapping asset return correlations into default correlations. Monte Carlo...

In this paper, we analyze the impact of default risk on the portfolio decision of an investor wishing to invest in corporate bonds. Default risk is modeled via a reduced form approach and we allow for random recovery as well as joint default events. Depending on the structure of the model, we are able to derive almost explicit results for the optimal portfolio strategies. It is demonstrated how...

This paper asks at what level of class imbalance one-class classifiers outperform two-class classifiers in credit scoring problems in which class imbalance, referred to as the low-default portfolio problem, is a serious issue. The question is answered by comparing the performance of a variety of one-class and two-class classifiers on a selection of credit scoring datasets as the class imbalance...