Our paper addresses firm size as a driver of systematic credit risk in loans to small and medium enterprises (SMEs). Key contributions are the use of a unique data set of SME lending by over 400 German banks and relating systematic risk to the size dependence of regulatory capital requirements....

We extend the Hidden Markov Model for defaults of Crowder, Davis, and Giampieri (2005) to include covariates. The covariates enhance the prediction of transition probabilities from high to low default regimes. To estimate the model, we extend the EM estimating equations to account for the time...

Higher default probabilities are associated with lower future stock returns. The anomaly cannot be explained by strategic shareholder actions, traditional risk factors, characteristics, or mispricing, but, instead, is consistent with a risk-shifting hypothesis. Consistent with the risk-shifting...

We highlight important and specific characteristics of default risk and methodological implications. In a simulation contrasting independent, Gaussian and Clayton copulas, we also show that joint default probabilities might be a hidden source of risk in conventional portfolio models of default

We consider an optimal risk-sensitive portfolio allocation problem accounting for the possibility of cascading defaults. Default events have an impact on the distress state of the surviving stocks in the portfolio. We study the recursive system of non-Lipschitz quasi-linear parabolic HJB-PDEs...

The aim of this paper is to address the validity of default probability models calibrated on a dataset including a very low (or none) number of defaults. The few approaches, proposed by the specialized literature are based on the confidence intervals computed via probabilistic, Bayesian or...

In this paper we stress-test credit portfolios of 28 German banks based on a Mertontype multi-factor credit risk model. The ad-hoc stress scenario is an economic downturn in the automobile industry that constitutes an exceptional but plausible event suggested by historical data. Rather than on a...

In recent years new methods and models have been developed to quantify credit risk on a portfolio basis. CreditMetrics (tm), CreditRisk+, CreditPortfolio (tm) are among the best known and many others are similar to them. At first glance they are quite different in their approaches and...

Stress testing, at its most general level, is an investigation of the performance of an entity under abnormal operating conditions. The authors focus on one set of entities — the Canadian banking sector — and investigate losses in the loans portfolio of this sector as a function of changing...

We develop a macroeconomic portfolio stress test that is specifically geared towards small and medium-sized banks. We combine a credit risk stress test which simulates credit impairments via a CreditMetrics type multi-factor portfolio model with an income stress test in the form of dynamic panel...