Rating Based Modeling of Credit Risk

Rating Based Modeling of Credit Risk

by Stefan Trueck, Svetlozar T. Rachev
Released January 2009
Publisher(s): Academic Press
ISBN: 9780080920306

Read it now on the O’Reilly learning platform with a 10-day free trial.

O’Reilly members get unlimited access to books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.

Start your free trial

Book description

In the last decade rating-based models have become very popular in credit risk management. These systems use the rating of a company as the decisive variable to evaluate the default risk of a bond or loan. The popularity is due to the straightforwardness of the approach, and to the upcoming new capital accord (Basel II), which allows banks to base their capital requirements on internal as well as external rating systems. Because of this, sophisticated credit risk models are being developed or demanded by banks to assess the risk of their credit portfolio better by recognizing the different underlying sources of risk. As a consequence, not only default probabilities for certain rating categories but also the probabilities of moving from one rating state to another are important issues in such models for risk management and pricing.
It is widely accepted that rating migrations and default probabilities show significant variations through time due to macroeconomics conditions or the business cycle. These changes in migration behavior may have a substantial impact on the value-at-risk (VAR) of a credit portfolio or the prices of credit derivatives such as collateralized debt obligations (D+CDOs). In this book the authors develop a much more sophisticated analysis of migration behavior. Their contribution of more sophisticated techniques to measure and forecast changes in migration behavior as well as determining adequate estimators for transition matrices is a major contribution to rating based credit modeling.

*Internal ratings-based systems are widely used in banks to calculate their value-at-risk (VAR) in order to determine their capital requirements for loan and bond portfolios under Basel II
*One aspect of these ratings systems is credit migrations, addressed in a systematic and comprehensive way for the first time in this book
*The book is based on in-depth work by Trueck and Rachev,

Table of contents

  1. Brief Table of Contents
  2. Table of Contents
  3. Dedication
  4. Preface
  5. Chapter 1. Introduction
    1. 1.1. Motivation
    2. 1.2. Structural and Reduced Form Models
    3. 1.3. Basel II, Scoring Techniques, and Internal Rating Systems
    4. 1.4. Rating Based Modeling and the Pricing of Bonds
    5. 1.5. Stability of Transition Matrices, Conditional Migrations, and Dependence
    6. 1.6. Credit Derivative Pricing
    7. 1.7. Chapter Outline
  6. Chapter 2. Rating and Scoring Techniques
    1. 2.1. Ratings Agencies, Rating Processes, and Factors
    2. 2.2. Scoring Systems
    3. 2.3. Discriminant Analysis
    4. 2.4. Logit and Probit Models
    5. 2.5. Model Evaluation: Methods and Difficulties
  7. Chapter 3. The New Basel Capital Accord
    1. 3.1. Overview
    2. 3.2. The Standardized Approach
    3. 3.3. The Internal Ratings Based Approach
    4. 3.4. Summary
  8. Chapter 4. Rating Based Modeling
    1. 4.1. Introduction
    2. 4.2. Reduced Form and Intensity Models
    3. 4.3. The CreditMetrics Model
    4. 4.4. The CreditRisk+ Model
  9. Chapter 5. Migration Matrices and the Markov Chain Approach
    1. 5.1. The Markov Chain Approach
    2. 5.2. Discrete Versus Continuous-Time Modeling
    3. 5.3. Approximation of Generator Matrices
    4. 5.4. Simulating Credit Migrations
  10. Chapter 6. Stability of Credit Migrations
    1. 6.1. Credit Migrations and the Business Cycle
    2. 6.2. The Markov Assumptions and Rating Drifts
    3. 6.3. Time Homogeneity of Migration Matrices
    4. 6.4. Migration Behavior and Effects on Credit VaR
    5. 6.5. Stability of Probability of Default Estimates
  11. Chapter 7. Measures for Comparison of Transition Matrices
    1. 7.1. Classical Matrix Norms
    2. 7.2. Indices Based on Eigenvalues and Eigenvectors
    3. 7.3. Risk-Adjusted Difference Indices
    4. 7.4. Summary
  12. Chapter 8. Real-World and Risk-Neutral Transition Matrices
    1. 8.1. The JLT Model
    2. 8.2. Adjustments Based on the Discrete-Time Transition Matrix
    3. 8.3. Adjustments Based on the Generator Matrix
    4. 8.4. An Adjustment Technique Based on Economic Theory
    5. 8.5. Risk-Neutral Migration Matrices and Pricing
  13. Chapter 9. Conditional Credit Migrations
    1. 9.1. Overview
    2. 9.2. The CreditPortfolioView Approach
    3. 9.3. Adjustment Based on Factor Model Representations
    4. 9.4. Other Methods
    5. 9.5. An Empirical Study on Different Forecasting Methods
  14. Chapter 10. Dependence Modeling and Credit Migrations
    1. 10.1. Introduction
    2. 10.2. Capturing the Structure of Dependence
    3. 10.3. Copulas
    4. 10.4. Modeling Dependent Defaults
    5. 10.5. Modeling Dependent Migrations
    6. 10.6. An Empirical Study on Dependent Migrations
  15. Chapter 11. Credit Derivatives
    1. 11.1. Introduction
    2. 11.2. Pricing Single-Named Credit Derivatives
    3. 11.3. Modeling and Pricing of Collateralized Debt Obligations and Basket Credit Derivatives
    4. 11.4. Pricing Step-Up Bonds
  16. Bibliography
    1. Bibliography

Product information

  • Title: Rating Based Modeling of Credit Risk
  • Author(s): Stefan Trueck, Svetlozar T. Rachev
  • Release date: January 2009
  • Publisher(s): Academic Press
  • ISBN: 9780080920306