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Ebook Estimating Market-implied Recovery Rates from Credit Default Swap Premia

... separation problem: In most CDS pricing equations, loss rates and probabilities of default are essentially multiplicatively ... debt prices and balance sheet information. They show that, given various types of debt of the same borrower, it is feasible to construct a ...

Story - puput - 11/05/2011 - 04:53 - 0 comments - 0 attachments

Ebook Evaluating Design Choices in Economic Capital Modeling: A Loss Function

... to extreme tail percentiles of a portfolio or whole-bank loss distribution. Economic capital requirements are then set to cover a ... estimation of asset-level default probabilities (PD), loss given default (LGD) rates, and cross-asset correlations of these same ...

Story - wulan - 10/06/2009 - 06:40 - 0 comments - 0 attachments

Ebook Commercial Bank Loan Loss Recoveries

... Two major components determine the extent of a credit loss suffered: first, the probability of a default (PD) and, second, the loss given default (LGD), which equals one minus the recovery rate in the event of ...

Story - wulan - 12/09/2009 - 02:08 - 0 comments - 0 attachments

Ebook Consumer Credit: Learning Your Customer's Default Risk from What (S)he Buys

... measure of credit risk in the U.S.), a weight of 35% is given to on time payment of past debt, 30% weight is given to the current ... loan to buy new tires for her car. I find that lender loss rates (measured as the ratio of the amount not repaid to the size of the ...

Story - puput - 10/08/2010 - 07:21 - 0 comments - 0 attachments

Ebook On Pricing Credit Default Swaps With Observable Covariates

... that observable covariates are very useful in predicting default. Shumway (2001) demonstrates that firm specific variables such as ... variables to estimate the probability of default. Given these studies on default prediction under the natural probability ... corporate bonds and CDSs, it is necessary to estimate the loss distribution under the pricing probability measure. There are several ...

Story - puput - 04/13/2011 - 02:15 - 0 comments - 0 attachments

Ebook Credit Risk Models IV: Understanding And Pricing CDOs

... each firm and the losses derived from each default (losses given default). Additionally, the degree of dependence between the firms’ ... by attachment points [KL,KU] won’t suffer any loss as long as the total portfolio loss is lower than KL percent of its ...

Story - puput - 11/11/2010 - 02:58 - 0 comments - 0 attachments

PDF Ebook Default correlation: An empirical investigation of a subprime lender

... a considerable 8.3% of the overall mortgage market. Given the growth of this market sector combined with the higher risks relative ... in the estimation of the tails of the overall credit loss distributions. Thus, failure to recognize the impact of shocks to the ...

Story - antoq - 11/11/2010 - 07:32 - 0 comments - 0 attachments

PDF Ebook Default correlation: An empirical investigation of a subprime lender

... a considerable 8.3% of the overall mortgage market. Given the growth of this market sector combined with the higher risks relative ... in the estimation of the tails of the overall credit loss distributions. Thus, failure to recognize the impact of shocks to the ...

Story - antoq - 11/11/2010 - 07:53 - 1 comment - 0 attachments

Ebook An empirical analysis of the relationship between credit default swap spreads and short-selling activity

... the American Insurance Group, AIG, which posted a record loss of US$61.7bn in the fourth quarter of 2008. In its simplest form, a CDS is ... the economic determinants of financial distress and loss given default. Structural models imply that the main determinants of the ...

Story - puput - 02/18/2011 - 03:58 - 0 comments - 0 attachments

Ebook A survey of cyclical effects in credit risk measurement models

... the recovery rate (or one minus the recovery rate, the loss given default LGD) as a function of macroeconomic factors. In Section 5, we ...

Story - wulan - 03/01/2010 - 06:53 - 0 comments - 0 attachments


Ebook Stochastic fertility, moral hazard, and the design of pay-as-you-go pension plans

Submitted by puput on Fri, 06/18/2010 - 04:04

A number of economists have recently advocated a policy of linking pension benefits (or contributions) to individuals’ fertility choices. The reason for this is that, with a pay-as-you-go social security system, the higher the number of children, the higher will be the available tax revenues (levied on the children when they grow up) to finance the pensions of the retired population. With all parents sharing the benefits associated with their own and every other parents’ having more children (the extra tax revenues their action generates), there is a positive externality in the system. This externality, if not corrected, implies that the equilibrium number of children in a decentralized system would be suboptimal.

A second and related issue concerns the “quality” of children and their human capital accumulation through educational decisions of the parents. The externality here arises because the rate of return of a pay-as-you-go (PAYG) system depends not just on the fertility rate, but also on productivity growth. The more productive the children, the higher will be their ability to produce and to pay taxes. This reinforces the public good nature of a family’s child rearing activities.

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Ebook Predicting Behavior in Agent-Based Models for Complex Systems

Submitted by puput on Fri, 05/13/2011 - 02:31

The world around us is a a very detailed and intricate system. In particular, real-world systems tend to comprise of many interacting parts, yielding a macroscopic dynamical behavior which features a complicated mix of unpredictability and predictability at various scales, e.g., ranging from the actions of each atom to each chemical to each animal to the human mind which is in many ways still a mystery leading to politics and society. These are all very particular examples of how it is a complex system, but one can imagine many more examples such as petals on a flower or even global warming.

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Ebook Dynamic asset allocation and latent variables

Submitted by puput on Sat, 07/31/2010 - 03:22

The solution to a multi-period portfolio problem can differ substantially from the solution to a static or single-period portfolio problem, as demonstrated originally by Samuelson (1969) and Merton (1969,1971,1973). This paper offers an explicit solution to a basic multi-period dynamic portfolio problem when the return dynamics are described by a multivariate time-series model and the investor is concerned with maximizing the expected utility of wealth at a given horizon. The modeling framework encompasses return generating models where some of the basic state variables are unobserved, and where the investor is faced with a filtering problem as part of the overall dynamic asset allocation problem. Our solution makes it possible to address, e.g., the portfolio implications of an estimated VAR-model that involves return-predictability for investors with different risk aversion and time horizons in a simple and consistent manner. Furthermore, when some of the state-variables are unobserved, we establish a close link between how unobserved state-variables can be handled consistently in the econometric estimation of the model as well as in a subsequent analysis of optimal asset allocation choice by using a Kalman filtering approach. This is explored in a realistic model calibration.

The multivariate discrete-time modeling of return dynamics is basically similar to the multivariate VAR-setting used by Campbell, Chan and Viceira (2003), but extended to the situation where some of the state-variables may not be directly observed by the investor. The general version of our return generating model is based on a state-space representation which consists of a transition equation and a measurement equation. The transition equation describes the return dynamics, and this is exactly the Campbell et al. (2003) multivariate VAR-model. The measurement equation describes what is being observed (and what is not).

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