Download Concentration Risk in Credit Portfolios by Eva Lütkebohmert PDF

By Eva Lütkebohmert

Modeling and administration of credits possibility are the most issues inside banks and different lending associations. old event indicates that, specifically, focus of probability in credits portfolios has been one of many significant factors of financial institution misery. hence, focus hazard is extremely correct to somebody who desires to transcend the very easy portfolio credits danger models.

The booklet offers an advent to credits chance modeling with the purpose to degree focus hazards in credits portfolios. Taking the elemental ideas of credits threat usually as a kick off point, a number of versions are studied. those permit banks to compute a likelihood distribution of credits losses on the portfolio point. in addition to those types the interior scores established version, on which Basel II is predicated, is treated.

On the foundation of those types quite a few equipment for the quantification of brand name and region focus chance and the therapy of default contagion are mentioned. The booklet displays present study in those parts from either an educational and a supervisory perspective

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Example text

Within the KMV model one computes the so-called Expected Default Frequency (EDF) based on the firm’s capital structure, the volatility of the asset returns and the current asset value in three stages. First, KMV uses an iterative procedure to estimate the asset value and the volatility of asset returns. Their method is based on the Merton approach of modeling equity as a Call option on the underlying assets of the firm with the firm’s liabilities as the strike price. Using this property of equity, one can derive the underlying asset value and asset volatility from the implied market value, the volatility of equity and the book value of liabilities.

DN ) ∈ {0, 1}N , we then obtain for the joint default probability conditional on a realization x of X N P(D1 = d1 , . . , DN = dN |X = x) = pn (x)dn · (1 − pn (x))1−dn . n=1 Integration over the distribution of the factor vector X, the mixing distribution, then yields the unconditional distribution of the default indicator D. In particular, we obtain for the unconditional default probability PDn of an individual obligor n, PDn = P(Dn = 1) = E[pn (X)]. Let N Dn M= n=1 denote the number of defaulted companies up to time T.

6 this implies that 1 1 αq (LN ) = lim αq (E[LN |p(X)]) N →∞ N N →∞ N lim 1 N →∞ N N ELGD ·E[Dn |αq (p(X))] = lim n=1 = ELGD ·αq (p(X)) which is just the claim of the above theorem. 3 Relation Between Latent Variable Models and Mixture Models In this section we discuss the relationship between latent variable models and Bernoulli mixture models based on work by [61]. 2 of a latent variable model from Chapter 3. 1 (Conditional Independence Structure) A latent variable vector V has a K-dimensional conditional independence structure with conditioning variable X, if there is some K < N and a Kdimensional random vector X = (X1 , .

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