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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Credit rating of an Issuer

When to analysing historical movement of credit rating, sometime credit rating is put as Non-rated or NR. Is there any industry acceptance definition of ...
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Why do some TIPS bonds have credit spread < 0 [duplicate]

If we look at the yield spreads on Bloomberg of some TIPS bonds, we see they have credit spread < 0 (i.e. their yield is even lower than their benchmark treasury bonds) Why is that the case. ...
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3 answers
161 views

Why investment grade floor is set at Baa3/BBB-?

I have studied methodologies for Moody's and S&P ratings but haven't seen any instance where the respective agencies have mentioned the reason choosing Baa3/BBB- as the dividing line between ...
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Calculation of Total Credit Risk Capital % but seeing lower capital percentage for higher risk band. Is there any correction required?

I am trying to calculate the Total Credit Risk capital % for my learning purpose as given below. Assuming adding 1 single loan with different pds. i have noticed one point in the table and have two ...
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1 answer
98 views

Modelling Specialised Lending deals

This question by itself is less a quant question but it has impact on the quantitative model to use. In 2006 CEBS gudilines we find a definition similar to this: Specialised Lending (SP) is a sub-...
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1 answer
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Bond value as a function of spread change and duration/maturity

I am trying to calculate the change of value in a universe of bonds given a series of shocks to the credit spread of each bond. As a constraint, the initial dataset only contains the spread change for ...
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38 views

Credit risk migration

I got an excel file containing the credit risk data regarding ID, credit score, PD, LGD, original exposure, EAD, RWA, Expected loss, and Required capital. Question: The user has a number of ...
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1 answer
54 views

pooling equilibrium

I was hoping for some help on how to answer a question about pooling equilibrium. Suppose a bank wants to give loans of 1 million dollars to people, but it cannot differentiate between high risk ...
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Can a client have different credits on different buckets under IFRS9?

Suppose that client X has two credits, say $c1$ and $c2$: $c1$ is without delay, $c2$ is 50 days past due. By IFRS9, it happens that $c1$ must be in bucket one, and $c2$ must be in bucket two. Both of ...
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Help with simple derivation of probability of credit default

I'm going over a chapter in Hull's Options, Futures, and Other Derivatives and am stuck on how the probability of default is derived. Here's the image of the derivation. I can follow all of it except ...
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1 answer
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Credit loss data (discounted)

I am looking into a data provider which provide the credit loss data from different banks - https://globalcreditdata.org/interactive-dashboard/ They also provide ...
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1 answer
168 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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Credit rating of a company

Typically there are quite a few providers of Credit rating for different companies e.g. Crisil, S&P, Moodys etc. However I observed that, as part of risk management, different banks also derive ...
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1 answer
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Relationship between risk free rate and credit spread in the Merton model

Based on Merton model of credit risk, I understand that investing in a risky debt is the same as buying a treasury bond and writing a put option on the firm's assets with a strike price equal to the ...
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60 views

Simple Poisson monte carlo question

I have what I think is a simple Monte Carlo question that I need some help with. I am building a credit model that requires repetitive draws from a Poisson distribution, where these Poisson ...
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3 answers
145 views

How does the bank uses the provisioning amount and RWA based capital adequacy

As I am new to the banking risk management, I need some clarity on the concept of provisioning and capital adequacy with respect to banking industry. As the banks make loans and some of these loans ...
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55 views

PD estimation methods

Could someone explain me or suggest a good reference how to categorize the PD calculation methods without going to deep in the details? I learned on riskmanagement lecture, that there are three major ...
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Time series data for probability of default (or credit ratings)

I'm currently investigating potential correlations among ESG ratings and credit ratings; more in particular, i'm trying to understand whether such correlation evolved during the last 20 (?) years, and ...
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85 views

seek clarification about PFE

I'm a software developer want to know a little about quant basics. My undserstanding of PFE is that a PFE of a trade at a future time point is commonly defined by taking the average of the highest (or ...
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1 answer
88 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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3 answers
957 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?
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1 answer
166 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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1 answer
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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 ...
2 votes
2 answers
244 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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4k views

How to calculate the CVA of a forward contract?

I am having trouble calculating the CVA of a forward contract. The question is presented below Question: There exists a long forwards position underlying on gold with 2 years remaining. The ...
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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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703 views

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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1 answer
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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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1 answer
142 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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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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1 answer
443 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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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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2 answers
194 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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132 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 ...
13 votes
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309 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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1 answer
278 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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1 answer
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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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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 ...
2 votes
3 answers
894 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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1 answer
102 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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1 answer
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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 ...
1 vote
1 answer
220 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 \...
2 votes
1 answer
203 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 ...
2 votes
1 answer
1k 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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365 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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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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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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365 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 ...
2 votes
3 answers
207 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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1 answer
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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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