A locally-built, LLM-digested index of recent arXiv papers in quant finance, geometry/topology, and statistical ML — keyword search served straight from SQLite on this machine.
Temporal aggregation reveals latent default correlation from monthly data.
Temporal coarse-graining of latent default paths explains effective correlation in corporate defaults.
Model clarifies network effects on CVA, revealing significant differences in derivative contract values.
In this paper we present a novel approach for firm default probability estimation. The methodology is based on multivariate contingent claim analysis and pair copula constructions. For each considered firm, balance sheet data are used to assess the asset value, and to compute its default probability. The asset pricing …
The consultative papers for the Basel II Accord require rating systems to provide a ranking of obligors in the sense that the rating categories indicate the creditworthiness in terms of default probabilities. As a consequence, the default probabilities ought to present a monotonous function of the ordered rating catego…
This paper generalizes Moody's correlated binomial default distribution for homogeneous (exchangeable) credit portfolio, which is introduced by Witt, to the case of inhomogeneous portfolios. As inhomogeneous portfolios, we consider two cases. In the first case, we treat a portfolio whose assets have uniform default cor…
The paper shows how to calculate risk-neutral default probabilities from bid and ask CDS quotes.
Bayesian and simulation methods predict credit default probabilities.
Model improves mortgage credit risk prediction with spatio-temporal machine learning.
Method determines credit transition matrix from cumulative default probabilities.
In recent years research on credit risk modelling has mainly focused on default probabilities. Recovery rates are usually modelled independently, quite often they are even assumed constant. Then, however, the structural connection between recovery rates and default probabilities is lost and the tails of the loss distri…
New method estimates corporate default probabilities using indirect data.
While defaults are rare events, losses can be substantial even for credit portfolios with a large number of contracts. Therefore, not only a good evaluation of the probability of default is crucial, but also the severity of losses needs to be estimated. The recovery rate is often modeled independently with regard to th…
Developed Merton's model for public companies using observed liabilities.
Solves optimal control for stochastic processes with absorbing states.
The article explains the probabilistic method of default probability estimation by Pluto and Tasche.
We investigate the impact of available information on the estimation of the default probability within a generalized structural model for credit risk. The traditional structural model where default is triggered when the value of the firm's asset falls below a constant threshold is extended by relaxing the assumption of…
We apply multiple testing procedures to the validation of estimated default probabilities in credit rating systems. The goal is to identify rating classes for which the probability of default is estimated inaccurately, while still maintaining a predefined level of committing type I errors as measured by the familywise …
Mean field game with defaultable agents and systemic risk quantified.
Credit risk stress tests can misrepresent default probabilities due to inconsistent parameterization.
Solves financial and non-financial problems using heat potentials.
A control-theoretic model tackles microfinance sustainability issues.
The current research on credit risk is primarily focused on modeling default probabilities. Recovery rates are often treated as an afterthought; they are modeled independently, in many cases they are even assumed constant. This is despite of their pronounced effect on the tail of the loss distribution. Here, we take a …
We compare observed corporate cumulative default probabilities to those calculated using a stochastic model based on an extension of the work of Black and Cox and find that corporations default as if via diffusive dynamics. The model, based on a contingent-claims analysis of corporate capital structure, is easily calib…
We consider discrete default intensity based and logit type reduced form models for conditional default probabilities for corporate loans where we develop simple closed form approximations to the maximum likelihood estimator (MLE) when the underlying covariates follow a stationary Gaussian process. In a practically rea…
Due to the lack of reliable market information, building financial term-structures may be associated with a significant degree of uncertainty. In this paper, we propose a new term-structure interpolation method that extends classical spline techniques by additionally allowing for quantification of uncertainty. The prop…
In this paper we formulate a corporate bond (CB) pricing model for deriving the term structure of default probabilities (TSDP) and the recovery rate (RR) for each pair of industry factor and credit rating grade, and these derived TSDP and RR are regarded as what investors imply in forming CB prices in the market at eac…
The paper analyzes the mathematics of the relationship between the default risk and yield-to-maturity of a coupon bond. It is shown that the yield-to-maturity is driven not only by the default probability and recovery rate of the bond but also by other contractual characteristics of the bond that are not commonly assoc…
Statistical test verifies long-term rating system calibration with overlapping time windows.
The paper analyzes how contagion affects the survival probability of investment groups in microfinance.
We present two methodologies on the estimation of rating transition probabilities within Markov and non-Markov frameworks. We first estimate a continuous-time Markov chain using discrete (missing) data and derive a simpler expression for the Fisher information matrix, reducing the computational time needed for the Wald…
Based on the work of Suzuki (2002), we consider a generalization of Merton's asset valuation approach (Merton, 1974) in which two firms are linked by cross-ownership of equity and liabilities. Suzuki's results then provide no arbitrage prices of firm values, which are derivatives of exogenous asset values. In contrast …
The paper calculates the likelihood of a financial market failure involving multiple major banks.
We study a simple, solvable model that allows us to investigate effects of credit contagion on the default probability of individual firms, in both portfolios of firms and on an economy wide scale. While the effect of interactions may be small in typical (most probable) scenarios they are magnified, due to feedback, by…
Study identifies contagion in aggregated defaults despite environmental changes.
Temporal coarse-graining of multi-sector default count data generates effective correlation matrices and rank copulas.
New RBM model outperforms copula models in credit risk management.
We compare two models of corporate default by calculating the Jeffreys-Kullback-Leibler divergence between their predicted default probabilities when asset correlations are either high or low. Our main results show that the divergence between the two models increases in highly correlated, volatile, and large markets, b…
We present a class of flexible and tractable static factor models for the term structure of joint default probabilities, the factor copula models. These high-dimensional models remain parsimonious with pair-copula constructions, and nest many standard models as special cases. The loss distribution of a portfolio of con…
Paper simplifies default process modeling and credit valuation.
This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility of correlated defaults. Using a multivariate normal Copula function for the joint default probabilities we show that retaining the first few moments of the portfolio default l…
Diversification increases systemic risk, contrary to belief.
We consider a structural model where the survival/default state is observed together with a noisy version of the firm value process. This assumption makes the model more realistic than most of the existing alternatives, but triggers important challenges related to the computation of conditional default probabilities. I…
Develops Merton's model for private companies using DDM.
Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between Merton-type and Black-Cox-type structural default models. Our framework leads to a singl…
This paper models default data to capture dynamic dependence across sectors.
Paper evaluates different models for predicting credit default swap volatility.
We derive a semi-analytic formula for the transition probability of three-dimensional Brownian motion in the positive octant with absorption at the boundaries. Separation of variables in spherical coordinates leads to an eigenvalue problem for the resulting boundary value problem in the two angular components. The main…