The risk that a borrower will default on any type of debt by failing to make required payments and that the corresponding lender suffers a loss.

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2
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4answers
136 views

Merton model riskless self-financing derivation

Suppose $dA_t = A_t[\mu dt+\sigma dW_t]$ (assets' value) under the physical measure, plus the other assumptions of the Merton model. Suppose further that debt and equity are tradeable assets that ...
5
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1answer
173 views

Calibration Merton Jump-Diffusion

Consider the following SDE $dV_t = rV_tdt +\sigma V_t dW_t + dJ_t$ where $J_t$ is a Compound poisson process with log-Normal jump size $Y_i$. How am I supposed to calibrate this model to CDS ...
7
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1answer
1k views

What makes IRC a market risk?

Since modeling leaves complete freedom we can assume both market and credit risks can enter the picture. However the minimum requirement is (migrations and) defaults simulation, how does this ...
0
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0answers
25 views

Bootstrap bond-implied default probabilities in MatLab?

Has anyone used MatLab to extract default probabilities from bond/fixed income prices? MatLab has some built in functionality to do this analysis with CDS ("cdsbootstrap"), but not bonds. Certainly ...
6
votes
5answers
157 views

Investment Grade Bond vs Junk Bond, whose duration is larger?

Just wondering how to calculate duration when take credit risk into consideration. I think if duration is calculated as weighted average of cashflow time, and weights are calculated using present ...
0
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0answers
18 views

RWA Calculations Formulae

I am working as IT developer for one of the investment bank and I have recently joined and it is completely new domain to me. While I am still learning about this domain, what I was looking for short ...
4
votes
3answers
347 views

Default Probability Implied in Bond Prices?

Say I am trying to find the probability of default on JP Morgan implied by the price of their fixed income assets. Can this be done? Are there any pitfalls to this approach? I have heard of this ...
1
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0answers
18 views

Using Put Volatilities to Estimate Firm Leverage/Credit Risk

This paper by Hull, Nelken and White uses implied volatilities in structural credit risk models to back out a market-implied leverage ratio. CreditGrades has a similar implementation using equity ...
1
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0answers
36 views

Bayesian analysis in R: Probability of default, low default portfolios

I want to apply the knowledge of this paper (Bayesian estimation of probabilities of default for low default portfolios, by Dirk Tasche) in R, but I can't find the right bayesian package and functions ...
1
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0answers
13 views

Why use Moody's KMV EDF for one year

If I were to use Moody's KMV proprietary database with expected default frequqncies(EDF) for sectors and countries, along with aggregations for financials and non-financials, significant banks etc: ...
1
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0answers
21 views

Valuation Models for Bank Credit Default

What approaches exist for calculating a fair price for a credit default swap for a bank? Most of the traditional valuation models are geared towards industrial firms. Are there any theoretical ...
3
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0answers
402 views

credit risk - How to calculate the probability of default (private companies)?

Part of my master thesis I am working with a company. I have the project to use their financial database with all the financials data (7 years) of approximately 3’000 companies. They have their own ...
0
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2answers
67 views

Business cycles and missing data

For many probability of defaults models in credit risk it is needed to use data observed from a "full" business cycles. Usually a business cycle is defined as a recurring (not necessarily periodic) ...
3
votes
2answers
103 views

Mathematical definitioln of Potential Future Exposure

I have come across a risk measure called "Potential Future Exposure" and I have not really understood the meaning of it. Knowing that this has to do with counterparty credit risk, I read different ...
0
votes
0answers
86 views

Altman Z-Score to Probability of default

I have computed the Altman Z Score for approximatly 2500 companies. I was wondering if mathematically I am allowed to use a logistic function ? Such as: ...
1
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0answers
44 views

How are CDS prices calculated for financial institutions?

If you need to estimate the fair price of a credit default swap on a financial institution, can it be done? Typical structural models tend to break down for the complex debt and asset characteristics ...
2
votes
0answers
36 views

Future value of the debt under Merton model

The author Malz states the future value of the firm's debt under the Merton model can be found from: $$ D_{t} = D - \max(D - A_{t} , 0) $$ (where $D$ is the par value of the debt, $A_{t}$ is the ...
0
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1answer
1k views

How to calculate Credit VaR?

(source John Hull, Options Futures and Other Derivatives 8th edition) I can't follow why Hull calculates Credit VaR in the following manner. I thought CVaR was Unexpected Loss$_{confidence}$ - ...
0
votes
0answers
31 views

Credit vs Non Credit OTTI

i am wondering if anyone can guide me through calculating the credit vs non credit components in OTTI. in 2 quarters..in first quarter neither asset suffers impairment..at end of second quarter, i ...
1
vote
1answer
133 views

CDO selling or buying credit protection?

I think there is an error in the Meissner text - Correlation Risk Modeling and Management and can't find an errata for this text to verify. On page 19 the foot note reads: Shorting the equity ...
3
votes
0answers
54 views

Modelling the Cost of Risk

I would like to read something about the cost of risk. Could anyone recommend some reference about how it is calculated or modelled?
1
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3answers
455 views

How do right-to-break clauses affect CVA calculations

Does the presence of a optional/mandatory right-to-break clause affect CVA calculations, and if so, how? Given two (otherwise identical) 10y swaps with the same counterparty, one of which has a right ...
1
vote
1answer
72 views

CVA using difference between 2 counterparty's spreads

The approximation to calculate CVA as a spread is $CVA = Spread * Expected$ $Exposure$. I assume this means the counterparty's spread over a proxy for the risk free rate such as LIBOR or OIS. Is this ...
3
votes
2answers
150 views

Extracting Default probability from a single CDS

I have to find the CDS's default probability using the simplest Poisson Process (intensity constant). I'm wondering how to get this estimate if I have only a CDS with maturity 5years. If I had ...
-1
votes
1answer
117 views

Where can I find data source for structural models?

I am starting a project to implement the Black-Merton-Scholes model from this book in R. However, I am looking for, ideally free, data sources. Still I have access to a Bloomberg terminal. Can you ...
1
vote
1answer
43 views

Can CreditGrades CDS Pricing Model be used for financial firms?

For Canadian banks, the CDS market is very illiquid and inactively traded. I want to get an estimate for the spread for a one year CDS on the Bank of Montreal. I was going to estimate this using the ...
3
votes
2answers
60 views

Can Economic Capital cover Regulatory Capital?

If economic capital is set by the institution to cover unexpected loss (given a confidence level) and regulatory capital is set by the regulator, can one "absorb" the other? For example, if I ...
2
votes
1answer
97 views

A little help with the Single Factor model for credit risk

I'm studying the "single factor model" in Malz text "Financial Risk Management - Models, History and Institutions". He only refers to it as such and gives it no proper name. The model: $a_{i} = ...
0
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0answers
17 views

What happens when collateral value fluctuates?

Under a Credit Support Annex, what happens when the posted collateral looses value beyond that of the haircut? e.g. I post \$62,500 in bonds in response to a \$50,000 collateral call with a 20% ...
2
votes
1answer
76 views

Is credit exposure conditional on default?

Credit exposure defines the loss in the event of a counterparty defaulting, and expected exposure is the average of all credit exposures. BUT When adjusting the CVA calculation to account for ...
0
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1answer
196 views

Why can't marginal CVA be used in pricing?

"Marginal CVA may be useful to breakdown a CVA for any number of netted trades into trade-level contributions that sum to the total CVA. Whilst it might not be used for pricing new transactions (due ...
1
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2answers
83 views

Credit exposure of a long CDS

According to Gregory, the exposure for. the long party of a credit default swap increases in its early years and then skyrockets when there is a credit event of the reference entity. I would have ...
0
votes
1answer
44 views

Why does the credit exposure of a forward increase with time

According to Gregory, the most obvious driving force behind credit exposure is future uncertainty. He characterizes the credit exposure of a forward contract as increasing with time; where exposure is ...
1
vote
1answer
137 views

How to compute the volatility for the Merton's Model for Private firm?

After one day of research i did not figured how to compute the input volatility for PRIVATE COMPANY in order to calculate the PD. My goal is to compute the PD of each of my company in my portfolio, ...
0
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0answers
64 views

Number of simulations for Monte Carlo CVA

Assuming we are calculating CVA across a netting set with a Monte Carlo methodology: 1) How many future dates ("horizons") would be typical - or does that depend entirely upon the composition of the ...
2
votes
0answers
42 views

Want to understand the links and relationship between all the risk metrics?

For Example : if Risk weighted asset (RWA) increased or decreased this month, which other risk metrics could have influenced RWA to increase or decrease. Also in different situations like, upward ...
1
vote
1answer
150 views

How are netting sets determined for CVA calculation?

In his book, Gregory describes a netting set as a set of trades that can be legally netted together in the event of a default Obviously, the netting agreements (as per ISDA master agreement) ...
0
votes
1answer
132 views

What are the canonical references on wholesale credit risk management?

I am trying to read up on "Wholesale credit risk ", but I can't find any useful references. Why is the emphasis on wholesale?
2
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0answers
128 views

Bayesian logit model in Psychometric or Behavioural Testing for Credit Scoring in Developing Countries

A lot of parameters in one title, I know. So there's credit scoring but not using credit history. Then there's using a Bayesian logit model. Then there's doing so in a developing country such as Haiti ...
3
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0answers
30 views

conferences for credit portfolio managers

What are worth conferences for credit portfolio managers? I appreciate your recommendations! PS:I am aware that this question is not the typical quant.SE question, BUT I couldn`t find reliable ...
4
votes
1answer
246 views

What structural model does Reuters use for default probability?

When using Reuters, for each listed company there is credit tab that shows relevant information in terms of credit default. There is also rating class as well as one year default probability. It is ...
1
vote
1answer
137 views

References for PD / LGD estimates of low-default portfolios

Any recommendations or reading sources for estimating individual PDs and LGDs for a set of low-default assets (souvereigns, investment grade corporates)? Since observing no defaults at all, regular ...
2
votes
2answers
276 views

Book recommendation for credit risk management for banking

What is a good beginner book on the topic of Credit Risk management for banking? I am a credit risk systems developer and most of my knowledge is in IT systems and programs that support the credit ...
0
votes
1answer
92 views

What are good online resources for credit portfolio managers?

I am aware that this question is not the typical quant.SE question, BUT I couldn`t find any site/forum/wiki, where credit portfolio managers hang out to share their experience and their methods. ...
1
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0answers
91 views

Create Markets Bubble Indicator

I am trying to replicate a Bubble Indicator described here. The indicator is strictly based on calculating the regularity of price behavior to determine herding in multiple time frames. I tried the ...
1
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1answer
121 views

What are the different Credit Portfolio Management models and what are their advantages?

CreditMetrics, RiskMetrics(Algorithims), etc. are all different risk methodologies used by many banks. However, what are their advantages/disadvantages? I would appreciate your replies!
0
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2answers
184 views

For Probability of Default in retail credit what is more popular logistic regression or GLM with Poisson distribution and why?

Trying to understand which regression model is more popular in retail credit card industry Logistic regression or GLM with Poisson distribution and why?
3
votes
1answer
1k views

Documentation of the ISDA CDS standard model

I have to validate the use of the ISDA CDS standard model. Don't understand me wrong - I am sure that the ISDA model is "good" I just need to know what it is in detail. I can download an ...
5
votes
1answer
171 views

Term structure of default probabilities without market data

With the forthcoming new regulations, IFRS9, financial institutions will be required to model life time expected credit losses. Consequently, it is necessary to model the term structure of default ...
1
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1answer
533 views

Actually benefiting from logistic regression to estimate probability of default

Does anyone know any events where using logistic regression to estimate probability of default has led to a bank, financial institution, government or anything really to benefit in practice? I see a ...