Introduction to Credit Risk Modeling 2nd Edition by Christian Bluhm, Ludger Overbeck, Christoph Wagner 1032920793 9781032920795

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ISBN 10: 1032920793

ISBN 13: 9781032920795

Author: Christian Bluhm; Ludger Overbeck; Christoph Wagner

Contains Nearly 100 Pages of New MaterialThe recent financial crisis has shown that credit risk in particular and finance in general remain important fields for the application of mathematical concepts to real-life situations. While continuing to focus on common mathematical approaches to model credit portfolios, Introduction to Credit Risk Modelin

Introduction to Credit Risk Modeling 2nd Table of contents:

Chapter 1: The Basics of Credit Risk Management

1.1 Expected Loss

1.1.1 Probability of Default (PD)

1.1.1.1 Ratings

1.1.1.2 Calibration of Default Probabilities to Ratings

1.1.2 The Exposure at Default

1.1.3 The Loss Given Default

1.1.4 A Remark on the Relation between PD, EAD, LGD

1.2 Unexpected Loss

1.2.1 Economic Capital

1.2.2 The Loss Distribution

1.2.2.1 Monte Carlo Simulation of Losses

1.2.2.2 Analytical Approximation

1.2.3 Modeling Correlations by Means of Factor Models

Chapter 2: Modeling Correlated Defaults

2.1 The Bernoulli Model

2.1.1 A General Bernoulli Mixture Model

2.1.2 Uniform Default Probability and Uniform Correlation

2.2 The Poisson Model

2.2.1 A General Poisson Mixture Model

2.2.2 Uniform Default Intensity and Uniform Correlation

2.3 Bernoulli versus Poisson Mixture

2.4 An Overview of Common Model Concepts

2.4.1 Moody’s KMV’s and RiskMetrics’ Model Approach

2.4.2 Model Approach of CreditRisk +

2.4.3 CreditPortfolioView

2.4.3.1 CPV Macro

2.4.3.2 CPV Direct

2.4.4 Basic Remarks on Dynamic Intensity Models

2.5 One-Factor/Sector Models

2.5.1 One-Factor Models in the Asset Value Model Setup

2.5.2 The CreditRisk +One-Sector Model

2.5.3 Comparison of One-Factor and One-Sector Models

2.6 Loss Dependence by Means of Copula Functions

2.6.1 Copulas: Variations of a Scheme

2.7 Working Example on Asset Correlations

2.8 Generating the Portfolio Loss Distribution

2.8.1 Some Prerequisites from Probability Theory

2.8.2 Conditional Independence

2.8.3 Technique I: Recursive Generation

2.8.4 Technique II: Fourier Transformation

2.8.5 Technique III: Saddle-Point Approximation

2.8.6 Technique IV: Importance Sampling

Chapter 3: Asset Value Models

3.1 Introduction and a Brief Guide to the Literature

3.2 A Few Words about Calls and Puts

3.2.1 Geometric Brownian Motion

3.2.2 Put and Call Options

3.3 Merton’s Asset Value Model

3.3.1 Capital Structure: Option-Theoretic Approach

3.3.2 Asset from Equity Values

3.4 Transforming Equity into Asset Values: A Working Approach

3.4.1 Itô’s Formula “Light”

3.4.2 Black-Scholes Partial Differential Equation

Chapter 4: The CreditRisk+ Model

4.1 The Modeling Framework of CreditRisk +

4.2 Construction Step 1: Independent Obligors

4.3 Construction Step 2: Sector Model

4.3.1 Sector Default Distribution

4.3.2 Sector Compound Distribution

4.3.3 Sector Convolution

4.3.4 Calculating the Loss Distribution

Chapter 5: Risk Measures and Capital Allocation

5.1 Coherent Risk Measures and Expected Shortfall

5.1.1 Expected Shortfall

5.1.2 Spectral Risk Measures

5.1.3 Density of a Risk Measure

5.2 Contributory Capital

5.2.1 Axiomatic Approach to Capital Allocation

5.2.1.1 Expected Shortfall Contribution

5.2.1.2 Spectral Capital Allocation

5.2.2 Capital Allocation in Practice

5.2.3 Variance/Covariance Approach

5.2.4 Capital Allocation w.r.t. Value-at-Risk

5.2.5 Capital Allocations w.r.t. Expected Shortfall

5.2.6 A Simulation Study

Chapter 6: Term Structure of Default Probability

6.1 Survival Function and Hazard Rate

6.2 Risk-Neutral vs. Actual Default Probabilities

6.3 Term Structure Based on Historical Default Information

6.3.1 Exponential Term Structure

6.3.2 Direct Calibration of Multi-Year Default Probabilities

6.3.3 Migration Technique and Q-Matrices

6.3.4 A Non-Homogeneous Markov Chain Approach

6.4 Term Structure Based on Market Spreads

Chapter 7: Credit Derivatives

7.1 Total Return Swaps

7.2 Credit Default Products

7.3 Basket Credit Derivatives

7.4 Credit Spread Products

7.5 Credit-Linked Notes

Chapter 8: Collateralized Debt Obligations

8.1 Introduction to Collateralized Debt Obligations

8.1.1 Typical Cash Flow CDO Structure

8.1.1.1 Overcollateralization Tests

8.1.1.2 Interest Coverage Tests

8.1.1.3 Other Tests

8.1.2 Typical Synthetic CLO Structure

8.2 Different Roles of Banks in the CDO Market

8.2.1 The Originator’s Point of View

8.2.1.1 Regulatory Arbitrage and Capital Relief

8.2.1.2 Economic Risk Transfer

8.2.1.3 Funding at Better Conditions

8.2.1.4 Arbitrage Spread Opportunities

8.2.2 The Investor’s Point of View

8.3 CDOs from the Modeling Point of View

8.4 Multi-Period Credit Models

8.4.1 Migration Model

8.4.2 Correlated Default Time Models

8.4.3 First-Passage-Time Models

8.4.3.1 Discrete Barrier Model

8.4.3.2 Continuous Time-Changed Barrier Model

8.4.4 Stochastic Default Intensity Models

8.4.5 Intertemporal Dependence and Autocorrelation

8.5 Former Rating Agency Model: Moody’s BET

8.6 Developments, Model Issues and Further Reading

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