Jacobs Mdl Rsk Par Crdt Der Risk Nov2011 V17 11 7 11
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It is not difficult to find situations of marked change in variables and with unpredictable event risk implies estimation problems. E.g., Credit spreads in 2008 rise to levels that could never have been forecast based upon previous history. The subprime crisis of 2007/8: credit spreads & volatility rise to unseen levels & shift in debtor behavior (delinquency patterns) E.g., estimating the volatility from data in a calm (turbulent) period implies under (over) estimation of future realized volatility
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Jacobs Mdl Rsk Par Crdt Der Risk Nov2011 V17 11 7 11
- 1. Risk Parameter Modeling for Credit Derivatives Michael Jacobs, Ph.D., CFA Senior Financial Economist Credit Risk Analysis Division U.S. Office of the Comptroller of the Currency Risk / Incisive Media Training, November 2011 The views expressed herein are those of the author and do not necessarily represent the views of the Office of the Comptroller of the Currency or the Department of the Treasury.
- 39. LGD Estimation for Credit Models: Judgmental Decision Tree for Corporate Unsecured
- 43. EAD Estimation for Credit Models: Defaultable Loans - Example
- 48. Correlation Estimation for Credit Risk Models – Sensitivity Analysis
- 55. PD Estimation Based on CDS Quotes vs. Vendor Model: Distributions of Output by Rating (Investment Grade)
- 56. PD Estimation Based on CDS Quotes vs. Vendor Model: Distributions of Output by Rating (Speculative Grade)
- 57. PD Estimation Based on CDS Quotes vs. Vendor Model: Output Over Time by Rating
Notas del editor
- Eg,: credit (PD, LGD, EAD), market (expected returns), insurance (frequency/severity claims, life expectancy)
- CR incl loss to dflt Note that bonds/loans may either be held to mat or for trading purp (bnk vs trd bk); loans may be under accr or fair value acc. Imp. of der. (or CP) CR illustrated by the Lehman failure (Moodys 2008): CDS trades ref LB=72B, LBsold CDS 2-3T & CP in many other der contr (FX, IR) See Warren Buiffet’s sharholder letter2001 in the context of insurance Eg, Cont Illinois 1984, Nippon Credit Bank 1998, Danish Roskilde Bank 2008. Contin: comp EC to avail cap, prof.: RAROC
- While theor EDF can be solved for, this treatment compensate for unreal mdl ass (& still calibr isues remian -
- Eg., CDS premia reflect PD & rec rate (EL=PD*LGD) – if make assumpt on LGD (constant) can back out PD There is a diff flavor of this that econometrically est PD from obs dflt – “hazzard rate mdls” Probl w/rtg trans from ag – loose link to issuer or ref ent ( Li 2000: if copula (just a mult cum dsn unif rvs –can link diff & arb marg dsns ) Guassian -> same as CreditMetr E.g., last appr Hull & White 2008 JD
- Note that disc factors Z comp from term str LIBOR & swap rates cons with interp of CDS prem as a floater yld spr on ref entity rel to libor
- Note that disc factors Z comp from term str LIBOR & swap rates cons with interp of CDS prem as a floater yld spr on ref entity rel to libor
- Note that disc factors Z comp from term str LIBOR & swap rates cons with interp of CDS prem as a floater yld spr on ref entity rel to libor
- May be direct inp (RMM) or der obl inf (SM) We want our est not to refl things out of contr obl –e.g., trans&conv event for country freezes outflows Eg coll matters: AIG tripped received govt loan to post coll & avoided dflt – is this real or not? Dflt def: ag (bankrupt,ren debt, missed payment-they claim basically B2), B2 (bank det unl to pay or obl 90dpd any mat obs-now typically same as nonaccr, but some diff do exist) PIT: PD refl curr sit->obl quickly upgr/downgr & DRs by rating same acr cycle, TTC: stable ratings but DRs fluctuate Scrcrd sys:popular because don’t rely on extensive internal default data (esp. for low dflt portf.) Stat mdls: more prev in rtl due to much dflt data
- May be direct inp (RMM) or der obl inf (SM) We want our est not to refl things out of contr obl –e.g., trans&conv event for country freezes outflows Eg coll matters: AIG tripped received govt loan to post coll & avoided dflt – is this real or not? Dflt def: ag (bankrupt,ren debt, missed payment-they claim basically B2), B2 (bank det unl to pay or obl 90dpd any mat obs-now typically same as nonaccr, but some diff do exist) PIT: PD refl curr sit->obl quickly upgr/downgr & DRs by rating same acr cycle, TTC: stable ratings but DRs fluctuate Scrcrd sys:popular because don’t rely on extensive internal default data (esp. for low dflt portf.) Stat mdls: more prev in rtl due to much dflt data
- May be direct inp (RMM) or der obl inf (SM) We want our est not to refl things out of contr obl –e.g., trans&conv event for country freezes outflows Eg coll matters: AIG tripped received govt loan to post coll & avoided dflt – is this real or not? Dflt def: ag (bankrupt,ren debt, missed payment-they claim basically B2), B2 (bank det unl to pay or obl 90dpd any mat obs-now typically same as nonaccr, but some diff do exist) PIT: PD refl curr sit->obl quickly upgr/downgr & DRs by rating same acr cycle, TTC: stable ratings but DRs fluctuate Scrcrd sys:popular because don’t rely on extensive internal default data (esp. for low dflt portf.) Stat mdls: more prev in rtl due to much dflt data
- May be direct inp (RMM) or der obl inf (SM) We want our est not to refl things out of contr obl –e.g., trans&conv event for country freezes outflows Eg coll matters: AIG tripped received govt loan to post coll & avoided dflt – is this real or not? Dflt def: ag (bankrupt,ren debt, missed payment-they claim basically B2), B2 (bank det unl to pay or obl 90dpd any mat obs-now typically same as nonaccr, but some diff do exist) PIT: PD refl curr sit->obl quickly upgr/downgr & DRs by rating same acr cycle, TTC: stable ratings but DRs fluctuate Scrcrd sys:popular because don’t rely on extensive internal default data (esp. for low dflt portf.) Stat mdls: more prev in rtl due to much dflt data
- May be direct inp (RMM) or der obl inf (SM) We want our est not to refl things out of contr obl –e.g., trans&conv event for country freezes outflows Eg coll matters: AIG tripped received govt loan to post coll & avoided dflt – is this real or not? Dflt def: ag (bankrupt,ren debt, missed payment-they claim basically B2), B2 (bank det unl to pay or obl 90dpd any mat obs-now typically same as nonaccr, but some diff do exist) PIT: PD refl curr sit->obl quickly upgr/downgr & DRs by rating same acr cycle, TTC: stable ratings but DRs fluctuate Scrcrd sys:popular because don’t rely on extensive internal default data (esp. for low dflt portf.) Stat mdls: more prev in rtl due to much dflt data
- A competitor to the well-known KMV model – the structural EDF based on Merton (1973) Refs: van Deventer & Imai book (2003), academic paper Chava & Jarrow RF 2004, Hosmer & Lemeshow (2000) bk log regr Just as diff classes of EC mdl, same for the drivers (and as PD is driver of EC, PD has its own drivers) Allows different expl var’s/mdls for diff hor
- Mlt LGD: avail only for mark debt, subj to ill/swings inv sent; W.O. / ult LGD: takes many years to get data, the B II std for many banks (esp middle mkt or priv debt portfolios), probl in meas (need all mat costs-coll costs, dir + indir) Diff WO prac -> banks see diff d-LGD behavior in diff portf (also
- Mlt LGD: avail only for mark debt, subj to ill/swings inv sent; W.O. / ult LGD: takes many years to get data, the B II std for many banks (esp middle mkt or priv debt portfolios), probl in meas (need all mat costs-coll costs, dir + indir) Diff WO prac -> banks see diff d-LGD behavior in diff portf (also
- Mlt LGD: avail only for mark debt, subj to ill/swings inv sent; W.O. / ult LGD: takes many years to get data, the B II std for many banks (esp middle mkt or priv debt portfolios), probl in meas (need all mat costs-coll costs, dir + indir) Diff WO prac -> banks see diff d-LGD behavior in diff portf (also
- Dflt Rate Serv d.b. – mkt LGD , MURD: ult LGD
- Dflt Rate Serv d.b. – mkt LGD , MURD: ult LGD
- Dflt Rate Serv d.b. – mkt LGD , MURD: ult LGD
- Facility ultimate LGD de(in)creasing in creditor rank, collateral quality, tranche thickness (time-to-maturity,EAD,ultimate obligor LGD, market LGD) Firm ultimate LGD de(in)creasing in leverage, liquidity, cash flow, size, profitability,industry utility/profit,time-between defaults,% secured or bank debt,CARs, prepack,S&P return, investment grade at origination (intangibility,Tobin’s Q, industry tech, # creditor classes, obligor market LGD, bankruptcy filing,recession period,Moody’s default rate)
- Typically borr going into dflt will try to draw down on credit lines as liqu or alt funding dries up Der. WWE ex.: 1. cross-FX swap with weaker curr CP: more likely to dflt just when curr weakens & bank is in the $ 2. CDS purch prot & insurer is deter same time as the ref entity As either borr deteriorates or in downturn, EAD risk may become lower as banks cut lines
- Looked at dflt rev in Moody’s MURD database & traced exposure back in fin filings (10Q &10K reports) Similar to JPMC (2001) study, added a few variables, and tried alt meas EAD risk to LEQ factor Caveat: onlt defaults up to early 2009, somewhat sens to the part meas, r^2 still low given # var’s ,judg calls in reading fin statements
- Contag.: phen that it is not only gen ec that makes firms default, but 2 nd order feedback eff (eg, real est./subpr crsis-dflt->suply overhang & neg wealth eff->depr ec cond further->more defaults) E.g., high frequ equ price (daily, weekly) corr can show small corr betw cycl & oncycl ind, but longer term (quart, ann) loss data can show high dep->need to analyze sens of estm to this Eg, incr lev & PD->decr value equ, which is consis with decr asset vol (equ is call opt); emp evid Gordy and HeitfeldL (2002) Eg, data sources: losses, equities, CDS
- Jacobs, Michael. (2010) “ Modeling the Time Varying Dynamics of Correlations: Applications for Forecasting and Risk Management ,” (with Ahmet Karagozoglu). Working Paper. Estimates over longer moving windows are smoother overall, but shorter window estimates can look to be zero over shorter time periods Corr can go from very negative to very pos from one time period to another – structural breaks Different sectors can have very diff avg corr to the broader market-implic for div
- Case of strured prod (tranche of RMBS) this is an order of magn more sens
- Starting pnt usually an annual migr matr See JPM 1997 tech doc CQV sim to AV process in str mdls & dflt thrhld like dflt buckets
- Ques. re equ corr as proxy dflt corr: De Servigny and Renault fin doverall equ only slightly hiugher, but large dev @ ind lvl -> reas for well div acr ind portf Kiesel et al: incl spr vol -> sign incr EC (esp high cr qual); called specific risk SM have av of mdl firm spec PDs & equ pr very resp chngs in cr qual (but many bank’s portf priv – but can use int ratings) CPV not widely used: diff in est rel spec DR & macro var’s acr ind & geog’s Bangia et al have a similarappr that est migr matr cond on the econom stste gd vs. bad & prob of state (switching mdl)
- Starting pnt usually an annual migr matr See JPM 1997 tech doc CQV sim to AV process in str mdls & dflt thrhld like dflt buckets
- 22 facilities, 8 names (comb fac for same name – same as 100% corr)