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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37 views

Structural Models vs. Intensity Models

Which type of models is commonly used for XVA calculation - Structural or Intesity? What are the main differences between them? In case of Intensity models, what type of this model is used (constant, ...
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82 views

How do I estimate the factor sensitivity in a Vasicek Single Factor Model?

I understand the formula of an asset return for an obligor i is given by the following: $$A_i = \sqrt{w_i}*Z + \sqrt{1-w_i}*\epsilon_i $$ My question is - How do I calculate $w_i$? I have the PD, LGD ...
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148 views

How to account for the credit spread ( e.g. LIBOR + 2%) when using the Multicurve Methodology in valuing a Swap

When valuing an Interest rate swap, counterparties will typically issue the contract at a Libor + credit premium, e.g. Libor +2%. When valuing a swap, we require a LIBOR forward curve and Discounting ...
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19 views

Mapping bank credit score to PD

I currently work in a bank so I do have some of the required information that is my bank (internal) assigned credit score and the calculated probability of default for every company. My question is ...
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Risky PV01 Vs CS01 for Credit Derivatives

Can someone please tell if there is a difference between CS01 and Risky PV01 of CDX or CDX Index Options ? Someone told me that they are technically equal only when Par Spread is equal to Standard ...
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74 views

Does credit default swaps have interest rate duration and credit duration?

Will a CDS have interest rate duration and credit duration? It does seem likely that the value of the CDS would depend on the underlying interest rate, or the spread. But when I try to Google this I ...
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29 views

Default rate short majurity

What is the best way of measuring default rates for a portfolio which contains mostly loans which are either 30, 60 or 90 days term? Normally I use the following methodology Look at all loans which ...
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78 views

A list of the 01's in the corporate bonds

I have frequently heard terms like DV01, CV01, PV01. Where can I get a list of these glossaries to study? I am not looking for a detailed explanation, just really a list.. Once I have the list, I can ...
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57 views

Liquid products/indexes to hedge/price a corporate bonds portfolio

Generally, for a corporate bonds portfolio, what are the common risk factors that's hedge-able through some liquid products? I know we can hedge the rate-risk through treasuries. We have some ETFs for ...
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171 views

CDS spread changes with its recovery rate

Not sure if my question makes any sense because I'm pretty new to the credit market. Suppose I have a 5Y CDS spread which is quoted as 100 bps with 40% recovery rate. So, if I want to estimate another ...
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142 views

Dependence between Credit Default Risk and Credit Spread Risk

I am trying to understand the difference and similarities between Credit Spread Risk and Credit Default Risk. Here is brief (and not all too precise) definition. Credit Spread Risk: Losses due to ...
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93 views

Why the increase of presumed recovery rate will increase the implied default probability?

From Hull's paper, the implied default probability (lambda) = credit spread/(1-recovery rate). Therefore, we can infer that, as the recovery rate goes up, the lambda will also go up. Why is that? I ...
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290 views

Why do we need to split market and default information into 2 separate filtrations?

The reduced-form approach to modelling derivatives with credit risk normally assumes the existence of two filtrations: A market filtration $(\mathscr{F}_t)_{t\geq0}$ carrying market and economic ...
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42 views

Variables for retail lending of bank

Typically to estimate the credit-worthiness of customers in retain bank lending, banks generally consider many demographic and socio-economic variables most importantly - Age, number of dependents, ...
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80 views

Why do bank stock returns increase from increased credit risk?

As part of my bachelor's thesis, I am running the following regression on daily bank excess returns: (r-rf)=Beta * Market excess return + Beta * Level(5Y)+ Beta * Credit Risk + error Level(5Y) is the ...
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80 views

Regression analysis in finance - book recommendation

Hey I am looking for a good book about regression analysis in finance (e.g. credit risk). Could you recommend something? It would be great if this book will be connected with some programmic language ...
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64 views

Generalized Linear Mixed Model (GLMM) for the probability of default of corporates

I work in the financial industry and we want to implement an internal rating model for our clients (think corporates large or mid , banks etc. some listed on an exchange some others not). We want to ...
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23 views

Estimate of loan risk due to change in income

Disclaimer: despite working at a bank, my background is in data science and not in quantitative finance. I'm very likely to miss certain technical terms of the domain and if that's the case, I'd ...
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29 views

Observed rating migration matrix to derive the generator matrix

I am doing some reading on the derivation of credit rating migration/transition matrices and probability of default term structures. I understand that a homogeneous Markov chain can be either discrete-...
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64 views

What are the CVA risks on a EUR/USD cross-currency swap 10y with Vodafone?

Can anyone tell me how I can approach solving this? What risks do I need to understand and quantify? A colleague has given this as an exercise to help me learn. Currently looking through the xVA ...
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42 views

For a bond, what is the formula for expected loss?

The expected loss equals PD * LGD * EAD, meaning probability of default times loss given default times exposure at default. I get how we can get PD and LGD, but what is the exposure at default (EAD) ...
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197 views

Calculation of the Probability of Default

I am reading a book from Tiziano Bellini namely IFRS 9 and CECL Credit Risk Modelling and Validation, to understand the default probability calculation (link : https://www.sciencedirect.com/science/...
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331 views

Reduced form of credit model

The price for a simple credit bond, where a credit event is modeled as the first jump of a Poisson process $N$, with stochastic hazard rate $\lambda$, is given by $$P_t = P(t, \lambda, N)$$ such that, ...
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29 views

Measuring stressed credit risk

What are good ways of measuring stressed credit risk specifically? I know usually we just "stress" all market conditions, but are there credit-risk specific things we can do? Or is it just a ...
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42 views

Default Probability estimation

Can you please provide some workout references on how to estimate the Default probability for Wholesale portfolio? How does it defer from Retail portfolio case? I ...
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What are Statistical methodologies practically used in Slotting approach as prescribed by EBA for specialized lending?

While preparing the Rating Tools (used to underwrite) specialized loans (project finance, object finance etc.), Underwriters go by their expert knowledge. Experts can identify the risk drivers and ...
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247 views

Exposure At Default: Calculating the present value

In this numerical example, I can't figure out with which numbers (when using the PV formula) to calculate exposure at default (EAD) as shown in the table. The EAD is the value of the discounted future ...
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109 views

IFRS9 - Lifetime Expected Credit Losses (ECL) Probability of Default (PD) - how do they get distributed in quarters?

Let's assume we calculate a Lifetime ECL of 5 years. How do we then distribute the expected losses in each of the following 20 quarters? Do we just divide the lifetime ECL by 20 and calculate the ...
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70 views

Model Validation Aggregation Documentation (Binomial, Hosmer-Lemeshow, Tolerance) - Credit Risk et cetera

I came across some document that says for a PD (Probability of Default) model in order to assess its accuracy you need to first look at the Binomial Test, then the Hosmer-Lemeshow Chi-square test, ...
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193 views

Probability of Default calculation

I am looking for some good resources with handful of workout examples, on the modelling of the Probability of Default under IFRS9...
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162 views

Estimation of Default Probability using Merton's model

There is an explanation of Risk Neutral Default Probability using a Firm's Equity price here - https://www.mathworks.com/help/risk/default-probability-using-the-...
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39 views

Estimation of Default Probability from Bond

Typically the formula to calculate the default probability from corporate Bond looks like $\frac{S}{1-R}$ where $S$ is the ...
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339 views

Bond prices and probability of default

We learn in Finance 101 that the price of a bond is the present value of future cash flows. There is no mention of default risk. Still, bond prices move each day, without a change in the payment ...
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42 views

Books on loans (car, house, etc...), pricing and securitization?

I'm looking for a good book on credit analysis, lending, car loans, house loans, etc... I would like to understand the theory and practice behind it. Most books I google for are for the consumer like ...
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121 views

„Backtesting“ of a Credit VaR Model

Coming from a market risk background, I am wondering how to validate / backtest a credit risk model in practice. Here, I am specifically not asking about the PD/migration validation, but about the ...
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108 views

ETF Arbitrage and Tracking: Impacts of a debt crisis

I am interested in the impacts of a debt crisis on the tracking ability of an ETF. In particular I have read that the market makers for ETFs often take on large short-term loans in order to create or ...
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49 views

Multi-period Basel/Vasicek formula

I need to apply Basel/Vasicek formula to a 20-years horizon, both from a 20-years cumulative perspective and year-on-year basis. Please find below the formula of the Basel Capital (ie. unexpected loss)...
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392 views

How to derive the expected loss from the credit risk of a bond?

I am trying to work out a formula to derive the expected loss from the credit risk of a bond. My idea is to tie the credit risk to credit valuation adjustment and derive the expected loss from there, ...
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150 views

Does bond market trading price has recovery assumption in mind?

We all know fixed income seucirties have default risk which can be generated from CDS market. However, I am curious if the market trading price of a bond (say, $105) imposing any recovery assumption? ...
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79 views

A model for probability of credit rating change for a single issuer

I am looking to model the probability of a single issuer upgrading or downgrading it's credit rating at some time using historical data. I have done research and everything I have found so far are for ...
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530 views

EAD = Drawn amount + Undrawn amount * CCF?

I am pretty sure the following is true $$ \text{EAD} = \text{Drawn Amount} + \text{Undrawn Amount} \times CCF $$ where $\text{CCF}$ is the credit conversion factor. It means if an overdraft line is ...
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Credit Migration: Risk [duplicate]

Hi I am given two tables of two tables showing data about fictional corporate business partners and relevant credit risk data – ID, rating, probability of default (PD, defined by rating), loss given ...
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1answer
170 views

Credit Migration Risk

I have a problem in which I have been given data for two periods over a set of customers. Each set consists of the fields: ID, rating, PD, LGD, Exposure (on- and off-balance sheet exposures), EAD, RWA,...
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132 views

Bayesian analysis in R for 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 ...
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100 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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1answer
164 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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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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174 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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51 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 ...