This paper presents a framework for estimating losses for residential mortgage loans. At the core is a transitions-based probability of default model which yields directly observable cash-flows at the loan level. The estimated model includes coefficients on unemployment, Loan to Value ratio and interest rates, all of which allow a macroeconomic scenario to be fed through the model and impact lo...

This paper develops a simple model based on an options approach to measure provisions covering expected losses of collateralised retail lending due to default. The dynamics of the probability of default of retail loans is allowed to follow a meanreverting random process, which captures the characteristics of an economic cycle. Based on the data of the residential mortgage market in Hong Kong, t...

The main motivation of this paper is to study the impact of the composition of creditors on the probability of default and the corresponding default risk premium on sovereign bonds, when there is debtor moral hazard. In the absence of any legal enforcement, relational contracts work only when there are creditors who have a repeated relationship with the borrower. We show that ownership structur...

This paper superimposes an assumption generation mechanism (AGM) and a lower bound propagation mechanism (LBM) on default reasoning. AGM generates minimal probabilistic assumptions which are needed to derive default conclusions safely, and LBM supplies (approximately) tight lower probability bounds of the conclusions. Together both mechanisms make default reasoning probabilistically reliable. T...

In his basic model of debt renegotiation, BESTER [1994] argues that collateral is more effective if high risk projects are financed. This result, however, crucially depends on the definition of risk. Using the second-order stochastic dominance criterion introduced by ROTHSCHILD AND STIGLITZ [1970], we show that it is not a project’s high risk, induced by a high probability of default, that make...

This paper develops a model to estimate the implied default probability of corporate bonds. The model explicitly considers the risk averse behavior of investors to provide a more precise framework for estimating the implied default probability. A Kalman filter method is used to estimate time-varying risk premium associated with the investor's risk aversion. The results of nonlinear regressions ...

The main goal of this paper is modeling credit risk of non-financial businesses entities by assessing the rating migration probabilities and predicting the probability of default over one year horizon on the basis of corporate financial accounts. Our research provides a number of new important insights. Ratings migration matrices are symmetrical in every observed period, which implies that defa...