Questions tagged [credit-risk]

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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1answer
53 views

CRRA Ultility, simple question

for CRRA, does increasing gamma leads to increase in risk-aversion? Looking at the curve, I think increasing gamma leads to less in risk-aversion (since the risk preimum is less). But in terms of ...
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29 views

CreditRisk+ spreadsheet implementation

I'm looking for an Excel spreadsheet where the CreditRisk+ model is implemented by means of a simple toy example, like the one the linked paper is referring to. If that spreadsheet is unavailable, I ...
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Crisis Impact on Credits by Type

I need to know what types of credits are more commonly harmed by times of financial crisis, for intance, during the 2008 crisis which type of credits where the frist to default and which the last. ...
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9 views

CVA for a portfolio of long and short options

I am looking to estimate the CVA/DVA for a portfolio of options. For simplicity sake, let's assume there are two FX options in the portfolio, one long and one short. Both options have the same ...
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129 views

Black-Cox yield spreads

From Lando (2004)* I am trying to replicate the following figure (Section 2.6 Default Barriers: The Black-Cox Setup): The spreads are computed as follows: $$s(T) = \frac{1}{T}\ln\frac{D}{B_0}-r$$ ...
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35 views

Where could I find code to compute Potential Future Exposure

Ideally code in SAS, R, Python or Matlab for calculations involving counterparties holding positions in energy markets on multiple price curves, with a Monte-Carlo methodology or a simpified ...
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10 views

Implied number of defaults in an Index CDS

Is there a standard way to imply the number of index defaults from index CDS pricing? For example, for the iTraxx XOVER index is it possible to infer the expected number of defaults in the index for 1 ...
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20 views

Individual Credit Risk Data - Probability of Default

Given the current coronavirus-induced financial crisis and the possibility that it evolves in an economical crisis trough Companies (See: Credit Is the Scariest Market to Watch, Not the Dow or S&P)...
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32 views

Derivation of the 99.9% CI to a 1 in a 1000 year event

Keen to understand how BASEL derived the 1 in a 1000 year event from the CI 99.9%: The confidence level is fixed at 99.9% (0.999) (i.e. a bank is expected to suffer losses that exceeds its capital ...
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1answer
61 views

Marginal Probability of Default for Credit Risk

I am working on a model to predict credit defaults. We have worked out PD's of clients using logistic regression. When calculating the default amount, we have to convert PDs to marginal PDs. The ...
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1answer
95 views

PDs for negative credit spreads

My question is about credit spreads and the corresponding probability of default (PD). One of the most simple relations between credit spreads and PDs is (see e.g. ch7 in Malz(2011)) $$ PD \approx \...
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64 views

Frye Jacobs LGD function

I have a regression model that predicts the PiT (Point in Time) default rate (PD). Can we use this PiT PD in the Frye Jacobs LGD function for making LGD forward looking ? In addition, is the ...
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85 views

Linking PD and LGD

I am trying to solve the equation for PD but struggling to bring it to the LHS. Any ideas as to how I can do that? $$ LGD = \frac{\Phi \left [ \Phi^{-1}(DR) - \frac{\Phi^{-1}(PD)-\Phi^{-1}(PD\cdot ...
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80 views

PD and LGD for ECL calculations needs to be time dependent?

I'm studying the implementation of an expected credit loss (ECL) model. I have encountered a complication. Do I need to calculate a probability of default (PD) and loss given default (LGD) with a time ...
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75 views

Quant valuation of a credit card debt (or flexible loan)

What would you say is the generally accepted quantitative method of valuing an individual credit card, or flexible loan? Is the method very changeable if that were a pool of such loans? Suppose the ...
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22 views

What are the meanings of the CreditGrades model's variables?

I need to know the exact names of variables in the formulas regarding CreditGrades model. The formulas are in the CreditGrades technical document: https://www.msci.com/documents/10199/dd31bcce-6fe3-...
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2answers
77 views

TED Spread Replacement?

Will replacing the 3-month tenor of the US LIBOR with SOFR or CME 3-Month SOFR Futures work as well as an indicator of credit risk? I have my doubts given: SOFR reflects secured lending LIBOR is ...
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42 views

Market vs. Credit Loss distributions: differences

If we define the Loss distribution of a portfolio as $$L_{t+h}=-(V_{t+h}-V_{t})$$ where $V_{t}$ is the value of the portfolio at time $t$ and $h$ is the time horizon, which are the (graphical) ...
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139 views

Credit VaR Formula

in Chapter 23 of Hull's Options, Futures, and Derivatives he has an example (i.e. example 23.4) which shows how the Credit VaR formula is applied. The answer in the formula is 0.128. I can't seem to ...
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89 views

PD calibration using Bayes formula

When calculating ECLs for loans under IFRS 9, one of the requirements is that the PD estimates have to be Point-in-time ($PD_{PIT}$) rather than through-the-cycle ($PD_{TTC}$).The setting is as ...
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134 views

sign of CVA (Credit Value Adjustment)

I recently read chapter 14 of Gregory's The xVA Challenge. He defines CVA as (formula 14.2) $$ CVA = -LGD \cdot \sum_{i = 1}^m EE(t_i) \cdot PD(t_{i-1}, t_i), $$ where $LGD$ is the Loss Given Default, ...
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77 views

Mapping FICO score to PD or Moody's Rating

I need to analyze the risk of a fund with various types of credits, such as consumer, student, and real estate. These categories all have FICO credit scores. I need to assess the risk of the fund ...
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33 views

To price Municipal Bonds and risks I want to know the percent of unfunded pension liabilities ($3.8T) to total state and local gov liabilities

Unfunded pension liabilities keep growing and this seems alarming to both pension holders but also Municipal Bond holders. I would like to know how large this problem is to better price Munis and ...
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58 views

Using transaction data to predict default of the customer

I am trying to build a prediction model that utilize the huge transaction database of all the customers of a bank. My dataset currently looks like this: ...
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82 views

Deriving the risk-neutral pricing formula for the 2-state credit risk model

I am reading Interest rate models by Cairns—specifically the chapter on credit risk. Cairns introduces first the simple 2-state continuous time Markov model for credit risk—with the two states being "...
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87 views

Normal default probability vs forward default probability/conditional default

is the diagram correct in calculating foward PD(conditional default) ? Or should the formula be Probability of default = probability of survival x forward PD Which of this is equal to marginal PD(...
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1answer
61 views

Relation between low rate and credit risk

In the Handbook of Fixed Incomes Securities, there is this part: The lower federal funds rate prods banks to be less aggressive in issuing deposits, such as certificates of deposits (CDs). Their ...
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1answer
75 views

Aggregation of $\rho$ and $p$ for a vasicek model

I'm currently facing the problem of how properly (analytically) adjust the parameters of an aggregated Vasicek (2002) loss distribution so that it has the same expected loss and 99% quantile as the ...
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149 views

default protection seller long or short credit risk?

A default protection seller is long/short credit risk?my guess it is short the credit risk, anyone can help clarify?
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172 views

Dominating credit risk modeling approaches for capital calculation in banks

In Basel/CRR (capital requirement regulation) there are various approaches for the estimation of capital requirements. For corporate exposures there is the Foundations IRB approach (F-IRBA, own ...
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47 views

What models are used to determine credit limits for credit cards?

I have an upcoming job interview as a statistician for a firm that sets credit card limits. In preparation, I'm trying to learn how credit limits are determined. I know that there are vast data-sets ...
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44 views

Equivalent of recovery rate

I'm trying to understand the functioning of "recovery of face-value" approach. Let $V_t$ the fair-value, that is the price that the holder of a defaultable bond must pay for hedging of default of ...
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56 views

Extracting Risk Neutral Default Probabilities using Option Adjusted Bond Prices

I am currently in a project trying to quantify default risk premia for US Corporate Bonds. The data I have consists of bond prices, and other information (i.e. YTM, OAS, Effective Duration, Maturity ...
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108 views

PD for ECL modelling

I am trying to understand the interrelations between the marginal, cumulative and conditional PDs (Probabilities of Default) when modelling ECLs (Expected Credit Losses). My current understanding is ...
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1answer
64 views

Effects of hedges on counterparty exposure used for RWA computation

In the context of Basel 2 requirements (BCBS128), how hedges affect the computation of counterparty exposure used in RWA calculation? Specifically, do hedges reduce the amount of exposure (EAD)? ...
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74 views

What are the go-to textbooks for advanced quant finance topics? [duplicate]

Credit risk, interest rate modelling, volatility modelling. What are the go-to books for each of these 3 topics in quant finance? The target audience should be someone who understands the basics of ...
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87 views

When a bank enters a swap with a counterparty, when does it decide to use a OIS curve as its CSA Term, versus a counterparty specific “CSA Curve”?

What determines whether a swap should be discounted against a standard OIS curve VS a 'custom' CSA curve specific to the swap's counterparty? (such custom curves are marked as spreads to some base ...
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1answer
141 views

Calculating PD of commercial bank loan

I have two main options to calculate PD of a loan in a commercial bank; with and without machine learning. On one hand, there are traditional methods such as Merton or KVM. On the other hand, I could ...
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1answer
366 views

rationale for maturity adjustment formula in basel IRB formula

For capital requirement, rwa is computed as a product of terms including a K (unexpected losses). (As shown is the summary from wikipedia : https://en.m.wikipedia.org/wiki/Advanced_IRB ) K is ...
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138 views

Financial Statement Analysis [closed]

So i have just completed a beginners course on understanding financial statements. As part of the final assignment, we are supposed to pick a real company, study its financial statements and conclude ...
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1answer
65 views

Connections between logistic regression, information value and Kullback-Leibler

I am new to credit risk modeling, my background is in mathematics and physics, so I am looking to justify some commonly used techniques from first principles. Suppose that we are interested in ...
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66 views

Exposure at Default (EAD) models with and without the Credit Conversion Factor (CCF)

Exposure at Default (EAD) models with and without the Credit Conversion Factor (CCF). What are the pros and the cons of each, and which one should use a small commercial bank?
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68 views

A quick and dirty loss distribution and Credit VaR

I need to create a loss distribution for a credit portfolio as the first steps to estimate the portfolio Credit VaR. I have historical monthly account snapshots (payment history) of all accounts ...
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54 views

Calculate the implied loss rate on a loan, given the interest charged

My bank has a retail credit portfolio of 100 million in loans. I know the payment history,balance history of all these loans since inception. Are there any tools to calculate an expected loss, a loss ...
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215 views

Need to solve the stochastic differential equation of Vasicek Model

How to solve the stochastic differential equation of the Vasicek model for the analysis of credit risk? I search in the article "The Distribution of loan portfolio value" (Vasicek) but he doesn't ...
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50 views

Gaussian copula: contract price

The hazard rates for A and B are 1% and 2% respectively. A contract pays you $1 if A defaults earlier than B. What is the correlation that minimizes the price of the contract? I have not studied the ...
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132 views

Spread Duration weighted OAS vs. Mkt Cap Weighted?

I am curious what the differences might be in rolling up OAS spreads across a portfolio by duration weighting vs. mkt cap weighting. @Alex yes I meant S.D. weighted not Duration weighted
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854 views

Deriving default probability from CDS spread via stripping

I am currently trying to derive the cumulative probability of default from a CDS spread where the LGD is 30% and there are quarterly premiums including the accrued premium. ...
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2answers
226 views

How does one make money from CVA (Credit Valuation Adjustment)?

I am new to Quantitative Finance but have been doing a lot of reading on Counterparty Credit Risk. I understand the definition of CVA being: "the difference between the risk-free portfolio value ...
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1answer
246 views

How to measure effectiveness of CDS hedging

In a fixed income emerging markets portfolio investing in Sovereign and Corporates, CDS on governement bonds are used for hedging credit risk. To be clear CDS are used to hedge both the exposure of ...