This paper aims to estimate the joint default probability under the structuralform model with a random environment; namely stochastic correlation. By means of a singular perturbation method, we obtain an asymptotic expansion of a two-name joint default probability under a fast mean-reverting stochastic correlation model. The leading order term in the expansion is a joint default probability wit...

The present paper aimed at studying the current models of credit portfolio management. There are currently three types of models which consider the risk of credit portfolio: the structural models (Moody's KMV model, and Credit- Metrics model), the intensity models (the actuarial models) and the econometric models (the Macro-factors model). The development of these three types of models is based...

The Basel II Accord pointed out benefits of credit risk management through internal models to estimate Probability of Default (PD). Banks use default predictions to estimate the loan applicants’ PD. However, in practice, PD is not useful and banks applied credit scorecards for their decision making process. Also the competitive pressures in lending industry forced banks to use profit scorecards...

nowadays, credit risk is recognized as one of the most important bankruptcy factors of banks and financial institutions. in order to manage and control this risk, design of credit rating models is undeniable necessity. credit rating is used to identify the probability of credit default and on the other side classify the customers into two groups: good and bad accounts. until now, various statis...

In this paper we present a novel Bayesian approach for default probability estimation. The methodology is based on multivariate contingent claim analysis and pair copula theory. Balance sheet data are used to asses the firm value and to compute its default probability. The firm pricing function is obtained via a pair copula approach, and Monte Carlo simulations are used to calculate the default...

In this paper, we study the relationship between default probability and stock returns. Using the market-based measure of Expected Default Frequency— (EDF—) constructed by Moody’s KMV, we first demonstrate that higher default probabilities are not necessarily associated with higher expected stock returns, a finding that complements the existing empirical evidence. We then show that the puzzling...