Foundation ERM Session 5: Credit Risk

This presentation is based on a part of an academic course on Enterprise Risk Management (ERM) titled ‘Credit Risk’ and covers topics such as: what is ‘credit’ risk and recent market developments in credit markets, credit portfolio risk models (including ratings-based models, equity-based models and mixture models) and issues with any type of model

1Session 5: Credit Risk
2Session 5: Credit Risk
3What is credit risk?
4Market developments
5Implications of new credit markets
6Credit portfolio risk models
7Credit portfolio risk models - typical uses
8Credit portfolio risk models - basic structure
9Session 5: Credit Risk
10Ratings-based models
11Ratings-based models: components
12Component 1: transition matrix
13Example Moody’s transition matrix
14Component 2: Spreads and interest rates
15Example spreads
16Valuation at horizon if no default
17Component 3: Valuation in defaulted state
18Component 4: Correlations / joint distribution
19Ordered probit approach
20Correlations for latent variables
22Example factor correlations
23Pros and cons of ratings based models
24Session 5: Credit Risk
25Equity-based credit portfolio risk models
26Equity and debt as options on asset value
27Pricing equity and debt as options
28More realistic default behaviour
29Implementing an equity-based credit risk model
30Implementing model statistically
31Default trigger
32Strengths and weaknesses of equity-based models
33Session 5: Credit Risk
34Mixture models (1)
35Mixture models (2)
36Session 5: Credit Risk
37Implementation issues for either type of model
38Broader issues
39Important Information

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