We develop a novel framework using Bayesian networks to capture distress dependence in the context of counterparty credit risk. This allows us to calibrate the probability of distress of an entity conditional on the distress of a different entity. We apply our methodology to wrong-way risk model...

Robustness of credit portfolio models is of great interest for financial institutions and regulators, since misspecified models translate to insufficient capital buffers and a crisis-prone financial system. In this paper, we propose a method to enhance credit portfolio models based on the model...

The models used to calculate post-crisis valuation adjustments, market risk and capital measures for derivatives are subject to liquidity risk due to severe lack of available information to obtain market implied model parameters. European Banking Authority (EBA) has proposed an intersection...