Observation-Driven Mixed-Measurement Dynamic Factor Models with an Application to Credit Risk

Risk Measurement With Integrated Market and Credit Portfolio Models

This paper studies the effect on economic capital from integrating interest rate and credit spread risk into credit portfolio models. By using fixed forward rates, most credit portfolio models currently employed in the banking industry ignore these risk factors. In contrast to previous studies, this paper accounts for correlated transition risk, credit spread risk, interest rate risk and also r...

The Grouped t-copula with an Application to Credit Risk

We describe a model that takes into account the tail dependence present in a large set of historical risk factor data using the modern concept of copulas. We extend the popular t-copula to obtain a new grouped t-copula which describes more accurately the dependence among risk factors of different classes. We explain how to estimate the parameters of the grouped t-copula and apply the method to ...

Dynamic Interest Rate and Credit Risk Models

Dependence Properties of Dynamic Credit Risk Models

We give a unified mathematical framework for reduced-form models for portfolio credit risk and identify properties which lead to positive dependence of default times. Dependence in the default hazard rates is modeled by common macroeconomic factors as well as by inter-obligor links. It is shown that popular models produce positive dependence between defaults in terms of association. Implication...

Functional Dynamic Factor Models with Application to Yield Curve Forecasting

Accurate forecasting of zero coupon bond yields for a continuum of maturities is paramount to bond portfolio management and derivative security pricing. Yet a universal model for yield curve forecasting has been elusive, and prior attempts often resulted in a trade-off between goodness of fit and consistency with economic theory. To address this, herein we propose a novel formulation which conn...