The validation of probability calibration is an inherently difficult task. We develop a testing procedure for credit-scoring models. The models comprise two components to check whether the ex-ante probabilities support the ex-post frequencies. The first component tests the level of the...

In this paper, we study the economic benets from using credit scoring models. We contribute to the literature by relating the discriminatory power of a credit scoring model to the optimal credit decision. Given the Receiver Operating Characteristic (ROC) curve of the credit scoring model, we...

In this study, we examine whether changes in the investment opportunityset stemming from interest rate and credit risks are priced in the US, theUK and the Swiss equity premia by estimating both two-factor and three-factor versions of Merton’s ICAPM. The systematic pricing of credit riskis...

This paper examines latent risk factors in models for migration risk. We employ thestandard statistical framework for ordered categorical variables and induce dependencebetween migrations by means of latent risk factors. By assuming a Markov process forthe dynamics of the latent factors, the...

Sustainable debt has become a key issue in rating of private as well as sovereign debtors. The problem of how to estimate sustainable debt has also been at the center of debate over theAsian 1997-1998 financial crisis. If the external value of the currency depends on the external debt of a...

In June 2003 Swiss banks held over CHF 500 billion in mortgages. This important segment accounts for about 63% of all loan portfolios of Swiss banks. Since default insurance is not common in Switzerland, the corresponding risks are a severe threat for the health of the financial system. We...

In single-obligor default risk modelling, using a background filtration in conjunction with a suitable embedding hypothesis (generally known as H-hypothesis or immersion property) has proven a very successful tool to separate the actual default event from the model for the default arrival...

This paper develops a default-risky bond pricing model, which assumes that the default intensity is driven by a Markov chain and which accounts for default and liquidity risk. A representation of the bond price dynamics, which separates three different types of risk, was obtained. Introducing...

We propose a simple and implementable model of credit contagion where we in-clude macro- and microstructural dependencies among the debtors within a creditportfolio. We show that, even for diversified portfolios, moderate microstructuraldependencies have already a significant impact on the tails...

This paper studies in some examples the role of information in a default-risk framework. In a first-passage model, we assume that investors obtain two types of information about the firm’s unlevered asset value at a discrete sequence of dates. The effects of information on the distributional...