Stress testing / Liquidity and funding risk [21]

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Bullet points include: We e.g. want to calculate a set of correlations for pairs of industries E.g. assume n=1, …, N obligors, and k=1, …, K industries, n’th obligor has rating at time t of R(n,t) and is in industry I(n), and that obligors in a given industry have a single common risk factor And assume rating changes at time t for n’th obligor are driven by a Gaussian latent variable: Could estimate unconditional model structure using e.g. maximum likelihood

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