384 Pages 50 B/W Illustrations
    by Chapman & Hall

    Contains Nearly 100 Pages of New Material

    The 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 Modeling, Second Edition presents updates on model developments that have occurred since the publication of the best-selling first edition.

    New to the Second Edition

    • An expanded section on techniques for the generation of loss distributions
    • Introductory sections on new topics, such as spectral risk measures, an axiomatic approach to capital allocation, and nonhomogeneous Markov chains
    • Updated sections on the probability of default, exposure-at-default, loss-given-default, and regulatory capital
    • A new section on multi-period models
    • Recent developments in structured credit

    The financial crisis illustrated the importance of effectively communicating model outcomes and ensuring that the variation in results is clearly understood by decision makers. The crisis also showed that more modeling and more analysis are superior to only one model. This accessible, self-contained book recommends using a variety of models to shed light on different aspects of the true nature of a credit risk problem, thereby allowing the problem to be viewed from different angles.

    The Basics of Credit Risk Management
    Expected Loss
    Unexpected Loss
    Regulatory Capital and the Basel Initiative

    Modeling Correlated Defaults
    The Bernoulli Model
    The Poisson Model
    Bernoulli versus Poisson Mixture
    An Overview of Common Model Concepts
    One-Factor/Sector Models
    Loss Dependence by Means of Copula Functions
    Working Example on Asset Correlations
    Generating the Portfolio Loss Distribution

    Asset Value Models
    Introduction and a Brief 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

    Risk Measures and Capital Allocation
    Coherent Risk Measures and Expected 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
    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 (CDOs)
    Different Roles of Banks in the CDO Market
    CDOs from the Modeling Point of View
    Multi-Period Credit Models
    Former Rating Agency Model: Moody’s BET
    Developments, Model Issues, and Further Reading

    References

    Index

    Biography

    Over the years, Christian Bluhm has worked for Deutsche Bank, McKinsey, HypoVereinsbank’s Group Credit Portfolio Management, and Credit Suisse. He earned a Ph.D. in mathematics from the University of Erlangen-Nürnberg.

    Ludger Overbeck is a professor of probability theory and quantitative finance and risk management in the Institute of Mathematics at the University of Giessen. During his career, he worked for Deutsche Bundesbank, Deutsche Bank, HypoVereinsbank/UniCredit, DZBank, and Commerzbank. He earned a Ph.D. in mathematics from the University of Bonn.

    Christoph Wagner has worked for Deutsche Bank, Allianz Group Center, UniCredit/HypoVereinsbank, and Allianz Risk Transfer. He earned a Ph.D. in statistical physics from the Technical University of Munich.

    … this is a concise book for exploring the limitations of credit risk models and, to a lesser degree, asset valuation models. Read this book for a companionable journey through some of the limiting assumptions that make the models tractable. … it may be the first one [book] that wastes no time in getting to the point, and moving on.
    Annals of Actuarial Science, Vol. 5, June 2011

    Bluhm, Overbeck, and Wagner offer help to mathematicians and physicists leaving the academy to work as risk or portfolio managers. For this introduction, they focus on main themes rather than details, and on portfolio rather than single obligor risk. … this second [edition] takes account of problems in the banking industry [from] 2007-09.
    SciTech Book News, February 2011

    Having a valid and up-to-date credit risk model (or models) is one of the most important aspects in today’s risk management. The models require quite a bit of technical as well as practical know-how. Introduction to Credit Risk Modeling serves this purpose well. … it would best fit the practitioner’s needs. For students it can also be of great use, as an introductory course for credit risk models. A great first step into credit risk modeling. … The book provides a nice coherent overview of the methods used in capital allocation. … The book is written in a mixture of theorem-proof and applied styles. … I find this rather pleasing, as it gives the reader the edge of theoretical exposition, which is extremely important. … One really useful side of the book is that it provides step-by-step guide to methods presented. This should be really appreciated in industry and among students. …
    MAA Reviews, January 2011

    Praise for the First Edition
    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 modelling 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