The paper proposes an explainable AI model that can be used in credit risk management and, in particular, in measuring the risks that arise when credit is borrowed employing credit scoring platforms. The model applies similarity networks to Shapley values, so that AI predictions are grouped...

In this article, we outline some concepts relating to the use of stress testing in credit risk management. We begin by providing a simple taxonomy of stress scenarios and discussing the trade-offs that different approaches require for implementation. Our taxonomy is modeled after one that is...

The issue of model risk in default modeling has been known since inception of the Academic literature in the field. However, a rigorous treatment requires a description of all the possible models, and a measure of the distance between a single model and the alternatives, consistent with the...

We give a complete algorithm and source code for constructing what we refer to as heterotic risk models (for equities), which combine: i) granularity of an industry classification; ii) diagonality of the principal component factor covariance matrix for any sub-cluster of stocks; and iii)...

We study the effect of rollover risk on the risk of default using a comprehensive database of U.S. industrial firms during 1986–2013 This article is the most thoroughgoing empirical research to date to support the existence of a rollover risk effect on the risk of default. A one standard...

Standard financial stress tests are ad hoc. They offer no guidance on how to select the target stress levels, how to adjust for randomness within crisis, or how to integrate the results with other risk measures. The VarGamma metric introduced by Osband (2013) offers an appealing alternative. It...

This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of twelve tests from the US CCAR and the European EBA regimes in the time period from 2010 to 2018. We find that passing banks experience positive abnormal equity returns and...

This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of twelve tests from the US CCAR and the European EBA regimes in the time period from 2010 to 2018. We find that passing banks experience positive abnormal equity returns and...

We explore the design of climate stress tests to assess and manage macro-prudential risks from climate change in the financial sector. We review the climate stress scenarios currently employed by regulators, highlighting the need to (i) consider many transition risks as dynamic policy choices;...

The paper aims to analyze the effect of bank risk appetite on banks' default probabilities during the year of COVID-19 in 12 countries while controlling for bank-specific and country-specific effects over time. A System Generalized Methods of Moments (GMM) model of default probabilities is...