An Introduction to Credit Risk Modeling
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Summary
In today's increasingly competitive financial world, successful risk management, portfolio management, and financial structuring demand more than up-to-date financial know-how. They also call for quantitative expertise, including the ability to effectively apply mathematical modeling tools and techniques.
An Introduction to Credit Risk Modeling supplies both the bricks and the mortar of risk management. In a gentle and concise lecture-note style, it introduces the fundamentals of credit risk management, provides a broad treatment of the related modeling theory and methods, and explores their application to credit portfolio securitization, credit risk in a trading portfolio, and credit derivatives risk. The presentation is thorough but refreshingly accessible, foregoing unnecessary technical details yet remaining mathematically precise.
Whether you are a risk manager looking for a more quantitative approach to credit risk or you are planning a move from the academic arena to a career in professional credit risk management, An Introduction to Credit Risk Modeling is the book you've been looking for. It will bring you quickly up to speed with information needed to resolve the questions and quandaries encountered in practice.
Table of Contents
THE BASICS OF CREDIT RISK MANAGEMENT
Expected Loss
Unexpected Loss
Regulatory Capital and the Basel Initiative
MODELLING CORRELATED DEFAULTS
The Bernoulli Model
The Poisson Model
Bernoulli Versus Poisson Mixture
An Overview of Today's Industry Models
One-Factor/Sector Models
Loss Distributions by Means of Copula Functions
Working Example: Estimation of Asset Correlations
ASSET VALUE MODELS
Introduction and A Small Guide to the Literature
A Few Words About Calls and Puts
Merton's Asset Value Model
Transforming Equity into Asset Values: A Working Approach
THE CREDITRISK+ MODEL
The Modeling Framework of CreditRisk+
Construction Step 1: Independent Obligors
Construction Step 2: Sector Model
ALTERNATIVE RISK MEASURES AND CAPITAL ALLOCATION
Coherent Risk Measures and Conditional Shortfall
Contributory Capital
TERM STRUCTURE OF DEFAULT PROBABILITY
Survival Function and Hazard Rate
Risk-neutral vs. Actual Default Probabilities
Term Structure Based on Historical Default Information
3.
Term Structure Based on Market Spreads
CREDIT DERIVATIVES
Total Return Swaps
Credit Default Products
Basket Credit Derivatives
Credit Spread Products
Credit-Linked Notes
COLLATERALIZED DEBT OBLIGATIONS
Introduction to Collateralized Debt Obligations
Different Roles of Banks in the CDO Market
CDOs from the Modeling Point of View
Rating Agency Models: Moody's BET
Conclusion
Some Remarks on the Literature
Remarks
REFERENCES
Editorial Reviews
"This is an outstanding book on the default models that are used internally by financial institutions. This practical book delves into the mathematics, the assumptions and the approximations that practitioners apply to make these models work."
—Glyn A. Holton, Contingency Analysis
"There are so many financial tools available today and numbers are likely to grow in the future. If you work in this field of credit risk modeling, it is worth looking at the theoretical background, and this book is a well-rounded introduction."
—Journal of the Operational Research Society
"As an introductory survey, it does an admirable job. … this book is an important guide into the field of credit risk models. Mainly for the practitioner … It is well written, fairly easy to follow."
—Horst Behncke, Zentralblatt Math
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