In this paper it is analyzed whether a Fourier based approach can be an efficient tool for calculating risk measures in the context of a credit portfolio model with integrated market risk factors. For this purpose, this technique is applied to a version of the well-known credit portfolio model CreditMetrics extended by correlated interest rate and credit spread risk. Unfortunately, the characte...

Using particle system methodologies we study the propagation of financial distress in a network of firms facing credit risk. We investigate the phenomenon of a credit crisis and quantify the losses that a bank may suffer in a large credit portfolio. Applying a large deviation principle we compute the limiting distributions of the system and determine the time evolution of the credit quality ind...

In this paper, we outline some concepts relating to the use of stress testing in credit risk management. We begin by providing a simple taxonomy of stress scenarios and discussing the trade-offs that different approaches require for implementation. Our taxonomy is modeled after one that is common in the credit literature and involves concepts related to reducedform and structural approaches to ...

Credit risk is an important issue of current research in finance. While there is a lot of work on modelling credit risk and on valuing credit derivatives there is no work on continuous-time portfolio optimization with defautable securities. Therefore, in this paper we solve investment problems with defautable bonds and stocks. Besides, our approach can be applied to portfolio problems, where th...

A sophisticated approach for computing the total economic capital needed for various stochastically dependent risk types is the bottom-up approach. In this approach, usually, market and credit risks of financial instruments are modeled simultaneously. As integrating market risk factors into standard credit portfolio models increases the computational burden of calculating risk measures, it is a...

This paper studies the effect on economic capital from integrating interest rate and credit spread risk into credit portfolio models. By using fixed forward rates, most credit portfolio models currently employed in the banking industry ignore these risk factors. In contrast to previous studies, this paper accounts for correlated transition risk, credit spread risk, interest rate risk and also r...

This paper evaluates several alternative formulations for minimizing the credit risk of a portfolio of financial contracts with different counterparties. Credit risk optimization is challenging because the portfolio loss distribution is typically unavailable in closed form. This makes it difficult to accurately compute Value-at-Risk (VaR) and expected shortfall (ES) at the extreme quantiles tha...

The subprime crisis revealed that the adoption of suitable systems for the management of credit risk is of utmost concern. The Basel Committee on Banking Supervision (2009) advises banks to use credit portfolio models with caution when assessing the capital adequacy. This paper investigates whether decisions on total risk-based capital ratios are channeled through credit portfolio models. In ot...

This paper proposes a new combination of quantitative models and Genetic Algorithms for the task of optimising credit portfolios. Currently, quantitative portfolio credit risk models are used to calculate portfolio risk figures, e. g. expected losses, unexpected losses and risk contributions. Usually, this information is used for optimising the risk-return profile of the portfolio. We show that...

In this paper, we present the macro stress test with a credit risk approach for banking system of Iran during the period 2004Q1-2019Q4. The goal is to evaluate the vulnerability of the banking system through credit risk to the country economic shocks. In this regard, the developed method of Wilson (1997) Credit Portfolio View model including macroeconomic variables and default rate has been use...