Copyright © 2006 R ecently, an unusually high number of firms in the economy defaulted, with the default rate for Moody’s-rated speculativegrade issuers reaching as high as 10.2% in 2001. In their annual review, Moody’s summarized these credit events as follows, “Record defaults —unmatched in number and dollar volume since the Great Depression—have culminated in the bankruptcies of well-known f...

Credit scoring models are usually formulated by fitting the probability of loan default as a function of individual evaluation attributes. Typically, these attributes are measured using a Likert-type scale, but are treated as interval scale explanatory variables to predict loan defaults. Existing models also do not distinguish between types of default, although they vary: default by an insolven...

The New Basel Capital Accord will allow the determination of banks’ regulatory capital requirements due to probabilities of default which are estimated and forecasted from internal ratings. Broadly, two rating philosophies are distinguished: Through the Cycle versus Point in Time Ratings. We employ a Likelihood-Ratio backtesting of both types with respect to their probability of default forecas...

By the end of 2011, agricultural population in accounted for 48.73% in China. Also, farmers in China are dispersed and their financial information is incomplete, which leads to credit risk evaluation system of farmers in China is not sound at all. Most Chinese banks even have not established the rating system, so farmer credit risk rating system pressed for solution. This study proposes an inde...

The internal-ratings based Basel II approach increases the need for the development of more realistic default probability models. In this paper we follow the approach taken in McNeil and Wendin (2006) by constructing generalized linear mixed models for estimating default probabilities from annual data on companies with different credit ratings. The models considered, in contrast to McNeil and W...

Modeling correlated default risk is a new phenomenon currently sweeping through the credit markets. Little is known about the drivers of default risk at the portfolio level. This paper develops a methodology to assess alternative specifications of the joint distribution of default risk. Specifications are based on three criteria: level, asymmetry, and tail-dependence in the joint default distri...

Current CVA modeling framework has ignored the impact of stochastic recovery rate. Due to the possible negative correlation between default and recovery rate, stochastic recovery rate could have a doubling effect on wrong-way risk. In the case of a payer CDS, when counterparty defaults, the CDS value could be higher due to default contagion while the recovery rate may also be lower if the econo...

This paper deals with the impact of structure of dependency and the choice of procedures for rareevent simulation on the pricing of multi-name credit derivatives such as n to default swap and Collateralized Debt Obligations (CDO). The correlation between names defaulting has an effect on the value of the basket credit derivatives. We present a copula based simulation procedure for pricing baske...