Credit Risk Modeling

Credit risk modeling has grown significantly over
the past few years; driven by explosive growth in
the credit derivatives market and more
quantitatively sophisticated bank capital
regulations under the upcoming Basel II Accord.
Credit risk modeling relies mainly on three
parameters,probability of default (PD),recovery rate
(RR)and correlation.This book intends first to
explain what is called the implied correlation
skew , and show that liquidity has some explanatory
power on correlation . The second section analyses
the relationship between credit default swap index
spread and stock market returns and the third
section provides a comprehensive analysis on the
cyclicality of default rates,recovery rates and
their dependence using financial data provided by
Bank Call Reports from 1991 to 2005 for all US
commercial banks with total assets greater than $300
millions. It shows that indeed, default rates and
recovery rates are cyclical and inversely related.
These findings have important implications in credit
risk modeling for both the credit derivatives market
and the new Basel II capital requirement proposed
rule(LGD).

Autorentext

Dr Ayari is an Assistant Professor of Finance at Wagner College in New York, and has been consulting and conducting financial training for major financial institutions in the US, Europe and Asia.Dr. Ayari received his Ph.D. in Financial Economics from the City University of New York and his MS from the University of Paris XIII (France).

Klappentext

Credit risk modeling has grown significantly over the past few years; driven by explosive growth in the credit derivatives market and more quantitatively sophisticated bank capital regulations under the upcoming Basel II Accord. Credit risk modeling relies mainly on three parameters,probability of default (PD),recovery rate (RR)and correlation.This book intends first to explain what is called the implied "correlation skew", and show that liquidity has some explanatory power on correlation . The second section analyses the relationship between credit default swap index spread and stock market returns and the third section provides a comprehensive analysis on the cyclicality of default rates,recovery rates and their dependence using financial data provided by Bank Call Reports from 1991 to 2005 for all US commercial banks with total assets greater than $300 millions. It shows that indeed, default rates and recovery rates are cyclical and inversely related. These findings have important implications in credit risk modeling for both the credit derivatives market and the new Basel II capital requirement proposed rule(LGD).