9 votes

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

One excellent resource is to try Kaggle and to examine some of the competitions, some of which are specifically on the application of machine learning to credit scoring. https://www.kaggle.com/c/...
Dom's user avatar
  • 2,137
7 votes

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

Both 'credit risk' and 'counterparty credit risk' refer to the same type of risk, i.e. the risk that the opposite side of a contract will not honor its obligations to repay. But 'credit risk' will be ...
cykor21's user avatar
  • 261
6 votes
Accepted

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

I think you are absolutely correct if the hazard rate is deterministic, although I think you are forgetting a discounting factor in your example. But sometimes the hazard rate cannot be assumed to be ...
mmencke's user avatar
  • 835
6 votes

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

The differences in credit risk between Moody's Baa2 versus Baa3 versus Ba1 versus Ba2 are all comparable. People would pay much less attention to agency ratings had the regulators not forced them to. ...
Dimitri Vulis's user avatar
5 votes
Accepted

Default Probability Implied in Bond Prices?

Assume : $R$ a recovery rate, a continuous payment a flat intensity $\lambda$ i.e $$\mathbb{P}(\tau>t)=e^{-\lambda t}$$ a flat discount rate $r$ With bonds prices Assuming JPM bond pays a coupon ...
M. Jeunesse's user avatar
  • 2,412
5 votes

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

There are different measures and interpretations of duration. One, as has been pointed out already, has a formula weighting coupons and final contractual cashflow. Other definitions of duration take a ...
horseless's user avatar
  • 266
5 votes

Does bond market trading price has recovery assumption in mind?

The price of a defaultable bond is driven by 3 things: the observable interest rates the probability of default the price of the bond after a default (or, equivalently, the loss given default) The ...
Dimitri Vulis's user avatar
5 votes

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

Your ${\cal F}$ is actually ${\cal G}$, that is the already enlarged filtration/probability space. So, the claim here seems to be that we do not have to consider the smaller, market filtration, ${\cal ...
ir7's user avatar
  • 5,008
5 votes

The difference between Credit Curve and CDS Curve

You should split this question into several. The same debtor can have slightly different credit curves for different products and tiers, eg 1at lien loans, senior unsecured bonds, subordinated... it'...
Dimitri Vulis's user avatar
4 votes

A little help with the Single Factor model for credit risk

The name for the model is Vasicek's single factor model. The model is very similar to CAPM: each asset has idiosyncratic and systemic risk with systemic risk driven by a single factor. Default ...
user9403's user avatar
  • 1,419
4 votes

Merton model riskless self-financing derivation

We construct a locally risk-free self-financing portfolio $X_t$, at time $t$, with $\Delta_t^1$ share of debt and $\Delta_t^2$ share of equity. That is, \begin{align*} X_t = \Delta_t^1 D_t + \Delta_t^...
Gordon's user avatar
  • 21k
4 votes
Accepted

Why is the overnight index swaps considered risk-free?

There's a lot of confusion here. Most Interest rate swaps (whether versus libor or another floating rate such as fed funds) have virtually no counterparty risk. That's because they are subject to ...
dm63's user avatar
  • 16.6k
4 votes
Accepted

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

Assuming zero recovery, let $\mathcal{C}$ be a counterparty you are facing on a derivative deal with value $V(t)$ and maturity $T$ such that $V(t)\geq 0$, for example an option. Let $CDS_\mathcal{C}(t,...
Daneel Olivaw's user avatar
4 votes
Accepted

EAD = Drawn amount + Undrawn amount * CCF?

Your equation is right. There are 2 ways to write EAD: EAD = Drawn + a x Undrawn; or EAD = a x Limit. In both equations, a is called CCF but it is derived/estimated differently depending on which ...
nyk's user avatar
  • 256
4 votes
Accepted

Estimation of Default Probability using Merton's model

As you see in the third equation on that Mathworks page, the Merton model postulates that the value of equity equals the value on a residual claim on a company's assets after the creditor has been ...
Kermittfrog's user avatar
  • 6,470
4 votes

Why do bank stock returns increase from increased credit risk?

Your “Credit Risk” variable sounds like it should be more accurately described as “Credit Spread”, which proxies the risk of loans. As credit spreads increase, the risk of the loans a finance company’...
Mild_Thornberry's user avatar
4 votes

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

1 ) Spread is for fwd only 4 ) Discounting is SOFR in any case (if using dual curve). See here for some details. That said, FF OIS still exists, but even this curve is discounted by SOFR and applies &...
AKdemy's user avatar
  • 8,143
4 votes
Accepted

seek clarification about PFE

Potential future exposure (PFE) is a concept in credit analysis, that is we are investigating the risk that a counterparty will not be able to pay us in the future. In a typical derivative deal ...
nbbo2's user avatar
  • 10.9k
4 votes

Where to find historical data on corporate credit ratings

I found this link with a lot of parsed data http://ratingshistory.info/
Niki Karaolis's user avatar
3 votes
Accepted

Copulas and default probability

$$\text{Pr}[\tau_1>t,\tau_2\leq t,\tau_3\leq t]=\text{Pr}[\tau_2\leq t,\tau_3\leq t] - \text{Pr}[\tau_1\leq t,\tau_2\leq t,\tau_3\leq t]$$ $$\text{Pr}[\tau_2\leq t,\tau_3\leq t]=C(1,q_2(t),q_3(t))$...
M. Jeunesse's user avatar
  • 2,412
3 votes
Accepted

How to calculate the CVA of a forward contract?

Actually the problem is that the probability of default the second year is conditioned by the default the first year. So you have to multiply 4%*101.21*99%, because 1% of the times it has already ...
oscar's user avatar
  • 54
3 votes

Default Probability Implied in Bond Prices?

One more thing that must be considered is the expected recovery rate. A model that ignores this rate is not tied to the real world. To estimate the probability of default, you would need to find the ...
RandyF's user avatar
  • 719
3 votes

CVA using difference between 2 counterparty's spreads

This is an oft-debated topic among CVA/DVA professionals at banks. The key question, as pointed out by one of the comments, is whether a bank can derive some type of benefit from the increase in its ...
dm63's user avatar
  • 16.6k
3 votes
Accepted

Calibration Merton Jump-Diffusion

Hi am having to write as an 'answer' as am new to forum. We used stochastic intensity models on desk from a while back. Generally Black-Karasinski to avoid negative hazard rates (and for useful ...
Mehness's user avatar
  • 518
3 votes

For IFRS9, losses should be discounted with the EIR, why is that sensible?

1. $V_0$ is what the bank would write for it's book value This is only the case for items held on the balance sheet at Fair Value. Most banks will hold many assets/loans at amortized cost (principal ...
Trevor Hansen's user avatar
3 votes

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

There is no significant difference between the two. Both can be considered a financial risk, although credit risk appear to have a slightly broader view. You might also hear the term default risk used....
Peacock's user avatar
  • 196
3 votes

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

I think the accepted answer gives the right insight, but I would like to add a further consideration: the difference between credit and counterparty risk is related to the main risk you are seeking ...
Daneel Olivaw's user avatar
3 votes

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

This is my take on the matter: ** Credit risk ** - this can be defined as the risks of default on financial obligations from the extension of credit directly to a counterparty or indirectly ...
Joseph Lee's user avatar
3 votes
Accepted

How to compute the CVA on a swap with SPV?

The assets of the SPV constitute a single corporate loan. Therefore the probability of default and LGD of the bond can be estimated from the CDS market for that corporate. Now the SPV defaults if ...
dm63's user avatar
  • 16.6k

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