By
Stefan Trueck, Postdoctoral Research Fellow, School of Economics and Finance, Queensland University of Technology, Australia
Svetlozar Rachev, Chair-Professor at the University of Karlsruhe in the School of Economics and Business Engineering
Description
In the last decade rating-based models have become very popular in credit risk management. These systems use the rating of a company as
the decisive variable to evaluate the default risk of a bond or loan. The popularity is due to the straightforwardness of the approach,
and to the upcoming new capital accord (Basel II), which allows banks to base their capital requirements on internal as well as external
rating systems. Because of this, sophisticated credit risk models are being developed or demanded by banks to assess the risk of their
credit portfolio better by recognizing the different underlying sources of risk. As a consequence, not only default probabilities for
certain rating categories but also the probabilities of moving from one rating state to another are important issues in such models for
risk management and pricing.
It is widely accepted that rating migrations and default probabilities show significant variations through
time due to macroeconomics conditions or the business cycle. These changes in migration behavior may have a substantial impact on the
value-at-risk (VAR) of a credit portfolio or the prices of credit derivatives such as collateralized debt obligations (D+CDOs). In this
book the authors develop a much more sophisticated analysis of migration behavior. Their contribution of more sophisticated techniques
to measure and forecast changes in migration behavior as well as determining adequate estimators for transition matrices is a major contribution
to rating based credit modeling.
Included in series
Academic Press Advanced Finance
Audience:
Primary readership: Both researchers, practitioners and financial institutions in the area of banking, mathematical finance,
risk management, especially credit risk management.
Secondary readership: The book may also
be used as textbook in an advanced course on credit risk or credit risk modelling..
