Counterparty risk reduced-form models typically hinge on an immersion property of a reference filtration into the full model filtration enlarged by the default times of the counterparties, as well as on a continuity assumption on some of the data at default time. This is too restrictive for cases of strong wrong-way risk, i.e. adverse dependence between the exposure and the credit riskiness of ...

Building on the award-winning, portfolio-based ASP solver claspfolio, we present claspfolio 2, a modular and open solver architecture that integrates several different portfolio-based algorithm selection approaches and techniques. The claspfolio 2 solver framework supports various feature generators, solver selection approaches, solver portfolios, as well as solver-schedule-based pre-solving te...

This paper analyzes the joint influence of the quality of a bank’s loan portfolio, the bank’s maturity gap and its deposit rate policy on the value of deposit insurance in an arbitrage-free Basel II consistent framework. We develop and apply a two-stage structural model of a bank where deposit insurance is a European put option on the loan portfolio, the default of each loan is driven by the bo...

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...

Simulation is widely used to estimate losses due to default and other credit events in financial portfolios. The challenge in doing this efficiently results from (i) rareevent aspects of large losses and (ii) complex dependence between defaults of multiple obligors. We discuss importance sampling techniques to address this problem in two portfolio credit risk models developed in the financial i...

We propose a new framework for modeling systematic risk in LossGiven-Default (LGD) in the context of credit portfolio losses. The class of models is very flexible and accommodates well skewness and heteroscedastic errors. The quantities in the models have simple economic interpretation. Inference of models in this framework can be unified. Moreover, it allows efficient numerical procedures, suc...

In this paper, we prove that the conditional dependence structure of default times in the Markov model of [4] belongs to the class of Marshall-Olkin copulas. This allows us to derive a factor representation in terms of “common-shocks”, the latter beeing able to trigger simultaneous defaults in some pre-specified groups of obligors. This representation depends on the current default state of the...

We present a structural jump-diffusion credit-portfolio model which models the loss distribution and dependence structure of the portfolio dynamically. We are able to obtain the log-asset correlation analytically and precise estimates of the term-structure of default correlations within the model. The models allows the simultaneous pricing of bonds, CDS and portfolio derivatives across all matu...

Resampling implementation of a stress-scenario approach to estimating portfolio default loss distributions is proposed as the basis for estimates of the appropriate absolute level of economic capital allocations for portfolio credit risk. Estimates are presented for stress scenarios of varying severity and implications of different time horizons are analyzed. Results for a numeraire portfolio a...

We consider a structural credit model for a large portfolio of credit risky assets. By considering the large portfolio limit we introduce a stochastic partial differential equation which describes the evolution of the density of asset values. The loss function of the portfolio is then a function of the evolution of this density at the default boundary. We develop numerical methods for pricing a...