Portfolio Models of Credit Loss III
About the Lecture
The lecture Portfolio Models of Credit Loss III by Edu Pristine is from the course ARCHIV Credit Risk. It contains the following chapters:
- Conditional Transition Probabilities - Credit Portfolio View Model
- Contingent claim approach in credit risk measurement
- Equity as an option on the Value of the Firm
- Actuarial approach
Author of lecture Portfolio Models of Credit Loss III
Edu Pristine
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Excerpts from the accompanying material
... multi-factor model that is used to simulate the joint conditional distribution of default and migration probabilities for various rating groups in different industries, and for each country, conditional on the value ...
... upon current and lagged macro-economic variables. In order to derive the conditional transition matrix, the (unconditional) transition matrix based on Moody’s or Standard & Poor’s historical data will be used. These transition probabilities are unconditional ...
... described previously, is rather appealing as a methodology. Unfortunately it has a major weakness: Reliance on ratings transition probabilities that are based on average historical frequencies of defaults and credit migration. As a result, the accuracy ...
... is that each firm can be analysed individually based on its unique features. The option pricing approach, introduced by Merton (1974) in a seminal paper, builds on the limited liability rule which ...
... that the loan is the only debt instrument of the firm, and that the only other source of financing is equity. In this case, as we shall see below, the credit value is equal to the value of a put option on the value of assets of the firm, at a strike ...
... of assets of the firm, at a strike price equal to the face value of debt (including accrued interest), and with maturity equal to the maturing of the debt. This shows that if the bank buys the put option with value P, the value at time T will be F whether VT ...
... are based on historical statistical data of default experience by credit class. Contrary to the structural approach to modelling default, the timing of default is assumed to take the bond-holders ‘by surprise’. Default is treated as an ...
... default in a given period, say one month, is the same as in any other month; 2. For a large number of obligors, the probability of default by any particular obligor ...
... i.e., the marked-to-market value, if positive – and zero, if negative – at the time of default) less a recovery amount. In order to derive the loss distribution for a well-diversified portfolio, the losses (exposures, net of the ...
... Portfolio View Origin JP Morgan, KMV Credit, Suisse Mckinsey, Type Bottom-up. Top-down Risk, defined Market value. Default losses market value risk driving asset ...
