This paper develops an empirical procedure for analyzing the impact of model misspecification and calibration errors on measures of portfolio credit risk. When applied to large simulated portfolios with realistic characteristics, this procedure reveals that violations of key assumptions of the...

This paper examines the systematic relationship between correlation mis-estimation and the corresponding Value-at-Risk (VaR) mis-calculation. To this end, first a semi-parametric approach, and then a parametric approach is developed. Both approaches are based on a simulation setup. Various...

Contingent credit lines (CCLs) are widely used in bank lending and also play an important role in the functioning of short-term capital markets. Yet, their pricing and hedging has not received much attention in the finance literature. Using a financial engineering approach, the paper analyzes...

Jamshidian and Zhu (1997) propose a discrete grid method for simplifying the computation of Value at Risk (VaR) for fixed-income portfolios. Their method relies on two simplifications. First, the value of fixed income instruments is modeled as depending on a small number of risk factors chosen...

Although much research has been devoted to external credit ratings, relatively little is known about the workings of banks' internal ratings. This paper aims at improving our understanding of internal risk rating systems (IRS) at large banks and the way in which they are implemented, and at...

Counterpart risk rating is at the heart of the banking business. In the new Basel II regulation, internal ratings have been given a central role. Although much research has been done on external ratings, much less is known about banks' internal ratings. This paper presents new quantitative...

Regulation requires banks to hold sufficent capital to cover their risks. Within the new framework commonly labeled Basel II, the Internal Ratings Based Approach (IRBA) allows banks to use their own rating systems to determine how much capital they must set aside for their credit risk. These...

This paper considers issues relating to the segmentation or grouping of credit exposures and the potential impact upon economic capital allocation and attribution. When discussing capital allocation, we refer to the assessment of total capital at the portfolio level, while our discussion of...

We propose a structural credit risk model for consumer lending using option theory and the concept of the value of the consumer's reputation. Using Brazilian empirical data and a credit bureau score as proxy for creditworthiness we compare a number of alternative models before suggesting one...

The Basel 3 Liquidity Coverage Ratio (LCR) is a micro prudential instrument to strengthen the liquidity position of banks. However if in extreme scenarios the LCR becomes a binding constraint, the interaction of bank behaviour with the regulatory rule can have negative externalities. We simulate...