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 Past Papers Archive |
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| Volume 4 /Number 3, Fall 2008 |
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Comment
Letter from the Editor-in-chief
Ashish Dev
The credit risk in US agency mortgages and mortgage-backed securities has always received little attention compared with the interest rate (prepayment) risk in them. It has been the wisdom that as long as each mortgage satisfies the agencies’ specific conditions (including the presumption that there is no systematic fraud in the documentation) and the portfolio is well diversified both in terms of size of each loan relative to the size of the portfolio and in terms of geographic distribution across the US, the portfolio credit risk is small. In the last couple of months, this wisdom has taken |
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Research Papers
Break on through to the single side
We employ a Lévy process subject to only negative jumps to describe the motion of asset values. This specification permits fast computation of first-passage probabilities. As a result, we are able to calibrate all credit default swap (CDS) curves for the 125 iTraxx underliers weekly and develop a time series for the implied parameter values. A variety of models are investigated for the process: gamma, inverse Gaussian and the one-sided CGMY, here referred to as CMY. |
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Research Papers
Valuing LCDS cancelability
American style loan credit default swap (LCDS) contracts are terminated if the underlying class of reference loan obligations cease to exist. Historical analyses indicate that firms retire their loan debt frequently and this most often occurs when improvements in obligors’ credit quality allows them to borrow at lower rates in the unsecured debt market. We estimate loan cancellation probabilities from historical rating transitions, assuming that when a high-yield credit becomes investment grade it will repay its loans. Spread values are calculated for non-cancellable and cancellable LCDS by ad |
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Research Papers
Development and validation of credit scoring models
Accurate credit granting decisions are crucial to the efficiency of the decentralized capital allocation mechanisms in modern market economies. Credit bureaus, and many financial institutions, have developed and used credit scoring models to standardize and automate, to the extent possible, credit decisions. We build credit scoring models for bankcard markets using the Office of the Comptroller of the Currency, Risk Analysis Division (OCC/RAD) consumer credit database (CCDB). This unusually rich data set allows us to evaluate a number of methods in common practice.We introduce, estimate and va |
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Research Papers
Maturity adjustments under asymptotic single risk factor models: a comparative analysis
Bank credit portfolios consist of instruments with different maturities. Both intuition and empirical evidence indicate that long-term credits are riskier than short-term credits. Consistent with these considerations, the Basel II maturity adjustment is a function of both maturity and default rate and is higher (in relative terms) for low default rate borrowers than for high default rate borrowers. This paper compares various methods to account for the maturity adjustment that fall within the framework of asymptotic single risk factor (ASRF) models. Section 2 reviews existing literature dealin |
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