Risk measurement and pricing of financial positions are based on modeling assumptions, which are common assumptions on the probability distribution of the position's outcomes. We associate a model with a probability measure and investigate model risk by considering a model space. First, we...

After Lehman default (credit crisis which started in 2007), practitioners considered the default risk as a major risk. The Industry began to charge for the default risk of any derivatives. In this article we try to extend the work of V.Piterbarg who established the fundamental of a new world in...

The main goal of this paper is to better understand the behavior of credit spreads in the past and the potential risk of unexpected future credit spread changes. One important consideration to note regarding credit spreads is the fact that bond spreads contain a liquidity premium, which...

A central component of the Basel III (B3) document is the "Sound practices for backtesting", i.e., a summary of strict regulatory guidances on how to validate and backtest Internal Method Models (IMM) for credit exposure. In the present work, we define a complete statistical framework to...

After Lehman default (credit crisis 2007), practitioners considered the default risk as a major risk. The regulators pushed the industry to use collateral in order to reduce the risk. In this new world, we want to see how this new considerations affect the theory related to the Partial...

The prices of or spread on credit default swaps (CDS) theoretically represent the pure credit risk of a firm. Callen, Livnat and Segal (2007) note that although the CDS premium is related to credit ratings issued by the rating agencies, rather wide variation in CDS spreads are observed for firms...

In this study we develop a theoretical model for ultimate loss-given default in the Merton (1974) structural credit risk model framework, deriving compound option formulae to model differential seniority of instruments, and incorporating an optimal foreclosure threshold. We consider an extension...

We present a data-driven proof of concept model capable of reproducing expected counterparty credit exposures from market and trade data. The model has its greatest advantages in quick single-contract exposure evaluations that could be used in front office xVA solutions. The data was generated...

In the last decade, stress tests have become indispensable in bank risk management which has led to significantly increased requirements for stress tests for banks and regulators. Although the complexity of stress testing frameworks has been enhanced considerably over the course of the last few...