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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13
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2answers
295 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 ...
11
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6answers
29k views

What's the difference between credit risk and counterparty credit risk?

As the title reads, what is the difference between credit risk and counterparty credit risk? What are the key differences?
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2answers
3k 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 ...
8
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1answer
5k 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 Excel-...
8
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2answers
5k 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 ...
7
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7answers
879 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 ...
7
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2answers
5k views

Is Unexpected Loss ever used in Basel II?

In Basel II, EL is useful. It's calculated as $$EL = PD \cdot EAD \cdot LGD $$ in advance IRB (internal rate-based approach), Correlation $$R = 0.12 \frac{1 – e^{-50 \cdot PD}}{1 – e^{-50}} + 0.24 ...
7
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0answers
72 views

Quantitative and regulatory aspects of portfolio integration in IRB credit portfolios

Say bank A buys a credit portfolio "B" (e.g. corporate loans or retail mortgage, ...) from bank B. Bank A fulfills the the requirements of CRR (capital requirement regulation) for its existing ...
6
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2answers
1k 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 spreads?...
6
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1answer
981 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 ...
6
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1answer
9k 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$_{confidence}$ - ...
5
votes
1answer
715 views

How to compute the CVA on a swap with SPV?

If we have a swap with a bank and Special Purpose Vehicle (SPV), and the swap is un-collateralized , how do we estimate Credit Value Adjustment on the swap? I will be able to get the Expected ...
4
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3answers
4k 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 ...
4
votes
1answer
584 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 ...
4
votes
2answers
315 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 ...
4
votes
1answer
2k views

Why is the overnight index swaps considered risk-free?

What I have understood is that the overnight index swap is bootstrapped to discount rates/zero rates that in their turn are considered risk free. The reason being, that the reference rate of such swap ...
4
votes
2answers
185 views

CDS - Accumulated Default Risk?

Say I issue insurance contracts covering fire damage in personal households. Fires occur with a probability of $x$% in a household (and they obviously occur independently from one another). If the ...
4
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2answers
6k views

Difference between VaR and credit VaR?

Quick question: is there a difference between credit VaR and VaR or are they the same thing?
4
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1answer
525 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 ...
4
votes
1answer
103 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 ...
4
votes
1answer
200 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 ...
4
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2answers
178 views

What are the quantitative approaches to quantify credit risk for Private Equity and Real Estate?

What are some quantitative approaches to estimating credit risk for investments that aren't publicly traded, such as private equity and direct real estate? I'm particularly interested in estimating ...
4
votes
1answer
141 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 ...
4
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0answers
9k 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 ...
3
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1answer
16k views

How do I use machine learning to build a credit scoring model? [closed]

There are currently a lot of ways for credit scoring. The most popular one is the FICO score, and its variants. For my masters thesis, I would like to work on making my own credit scoring system using ...
3
votes
3answers
359 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 ...
3
votes
2answers
110 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 ...
3
votes
3answers
390 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 ...
3
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2answers
567 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
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2answers
2k 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 ...
3
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1answer
1k views

Hedging bond with CDS of different maturity

Say I buy a 10-year bond with a notional of 100k. To hedge my credit risk entirely I could buy a 10-year CDS, also on a notional of 100k. Now, if there are only 5-year CDS trading and no 10-year CDS, ...
3
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2answers
302 views

CVA/CDVA - Worsened Credit Quality implies profit?

In the book Counterparty Credit Risk, Collateral and Funding by Brigo et al I found the following: credit quality of investor WORSENS $\Rightarrow$ books POSITIVE MARK TO MKT credit quality of ...
3
votes
1answer
4k views

Cost of Carry Bear Flattener

I was reading a report last week that “the carry on a 2s5s gilt curve flattener is negative to the tune of 10bp over 6 months” and I realised I have little understanding of this concept and how ...
3
votes
1answer
175 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 ...
3
votes
2answers
134 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 ...
3
votes
2answers
441 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, ...
3
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2answers
1k 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 ...
3
votes
3answers
6k 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 ...
3
votes
2answers
908 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 ...
3
votes
1answer
134 views

Simplifying an expectation function of default time and rates

I have the following expectation to calculate : $$ \mathbf{E}\left[ e^{\int_{t_0}^{\tau} r_s ds} \mathbf{1}_{\{\tau < T\}}\right] $$ More precisely, I want to show that : $$ \mathbf{E}\left[ e^{\...
3
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1answer
231 views

Data of Credit Migration Matrices

Please advise that how to get the data of credit migration matrices There is a paper of credit migration matrices, I would import the data to Matlab or R for credit analysis. https://www....
3
votes
1answer
118 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 ...
3
votes
1answer
5k views

What is Margin of Conservatism

In modelling loss given default,(LGD), we often encounter the term Margin of Conservatism. What is it in layman's terms? I am not able to find a wikipedia page on this.
3
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0answers
175 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: $$s(T) = \frac{1}{T}\ln\frac{D}{B_0}-r$$ ...
3
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0answers
109 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: ...
3
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0answers
38 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 ...
3
votes
0answers
159 views

Pre- Versus post-2008 Crisis Rates Modeling

Modeling for interest rate derivatives (such as bermudan swaptions) is said to have undergone significant changes since the crisis. Prior to the crisis, counterparty default risk was often ignored, ...
2
votes
3answers
183 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 ...
2
votes
2answers
155 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 ...
2
votes
1answer
2k 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 ...