We propose a portfolio credit risk model with dependent loss given default (LGD) which allows for a reasonable economic interpretation and can easily be applied to real data. We build up a precise mathematical framework and stress some general important issues when modeling dependent LGD. Finally, we calibrate the model based on American bond data from 1982 to 2001 and compare the results with ...

In this paper, we validate the performance of the MKMV EDF credit measure in its timeliness of default prediction, ability to discriminate good firms from bad firms, and accuracy of levels, with a focus on U.S. markets. We focus on the period 1996-2004 for most of our tests. Wherever possible, we compare the performance to that of other popular alternatives like agency ratings, Z-Scores, and a ...

The 2009 National Research Council report “Science and Decisions”1 recommends that the agency uses the best, most current science, to support or revise the default assumptions in the agency’s risk assessments. In addition, the 2013 Institute of Medicine report on “Environmental Decisions in the Face of Uncertainty”2 further recommends replacing default uncertainty factors with data-derived extr...

We analyze the connections between the credit spreads that the same credit risk commands in different currencies. We show that the empirically observed differences in these credit spreads are mostly driven by the dependency between the default risk of the obligor and the exchange rate. In our model there are two different channels to capture this dependence: First, the diffusions driving FX and...

The main objective of this paper is to introduce the methodology for the recognition of collateral for retail lending which is Basel II complaint. Basel II for the retail segment offers two possible approaches: the standardized approach and the Internal Ratings-Based (IRB) Approach. The standardized approach is relatively easy to apply and defines standard risk weights, whereas the IRB approach...

We prove a version of First Fundamental Theorem of Asset Pricing under transaction costs for discrete-time markets with dividend-paying securities. Specifically, we show that the no-arbitrage condition under the efficient friction assumption is equivalent to the existence of a risk-neutral measure. We derive dual representations for the superhedging ask and subhedging bid price processes of a c...

In 2005 the Internal Ratings Based (IRB) approach of ‘Basel II’ was enhanced by a ‘treatment of double default effects’ to account for credit risk mitigation techniques such as ordinary guarantees or credit derivatives. This paper reveals several severe problems of this approach and presents a new method to account for double default effects. This new asset drop technique can be applied within ...

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...

This paper investigates the effect of CFO gender on corporate financial reporting decision-making. Focusing on firms that experience changes of CFO from male to female, the paper compares the firms’ degree of accounting conservatism between preand post-transition periods. We find that female CFOs are more conservative in their financial reporting. In addition, we find that the relation between ...

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...