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...

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...

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...

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...

The new Basel II regulation contains a number of new regulatory features. Most importantly, internal ratings will be given a central role in the evaluation of bank loans' riskiness. Another novelty is that retail credit and SME loans will receive a special treatment in recognition of the fact...

Basel II framework requires banks to conduct stress tests on their potential future minimum capital requirements and consider 'at least the effect of mild recession scenarios'. We propose a stress testing framework for minimum capital requirements in which banks' corporate credit risks are...

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...

In the discussion paper, we employ data on industry-specific corporate sector bankruptcies over the time period from 1986 to 2003 and estimate a macroeconomic credit risk model for the Finnish corporate sector. The sample period includes a severe recession with significantly higher-than average...

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...