Since June 2007, the creditworthiness of structured finance products has deteriorated rapidly. The number of downgrades in November 2007 alone exceeded 2,000 and many downgrades were severe, with 500 tranches downgraded more than 10 notches. Massive downgrades continued in 2008. More than 11,000 of the downgrades affected securities that were rated AAA. This paper studies the credit rating crisis of 2007-2008 and in particular describes the collapse of the credit ratings of ABS CDOs. Using data on ABS CDOs we provide suggestive evidence that ratings shopping may have played a role in the current crisis. We find that tranches rated solely by one agency, and by S&P in particular, were more likely to be downgraded by January 2008. Further, tranches rated solely by one agency are more likely to suffer more severe downgrades.

The Credit Rating Crisis

This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks" At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees -- some explicit and others implicit Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w13607.pdf?abstractid=1032862&mirid=1&type=2

New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability

Optimal procurement strategies for online spot markets

This paper surveys a wide selection of the interpolation algorithms that are in use in financial markets for construction of curves such as forward curves, basis curves, and most importantly, yield curves. In the case of yield curves the issue of bootstrapping is reviewed and how the interpolation algorithm should be intimately connected to the bootstrap itself is discussed. The criterion for inclusion in this survey is that the method has been implemented by a software vendor (or indeed an inhouse developer) as a viable option for yield curve interpolation. As will be seen, many of these methods suffer from problems: they posit unreasonable expections, or are not even necessarily arbitrage free. Moreover, many methods lead one to derive hedging strategies that are not intuitively reasonable. In the last sections, two new interpolation methods (the monotone convex method and the minimal method) are introduced, which it is believed overcome many of the problems highlighted with the other methods discussed ...

/pdf/interpolation-methods-for-curve-construction-4s6o5fk531.pdf

Interpolation Methods for Curve Construction

This book offers state-of-the-art tools and techniques for controlling credit risk exposure of all types, in every environment. The oldest risk in world financial markets - credit risk - has become a leading source of problems and confusion, not just for bankers and investors but for all finance professionals."The Standard & Poor's Guide to Measuring and Managing Credit Risk" will help you understand every aspect of credit risk, and provide you with today's most up-to-date techniques and models for identifying, measuring, monitoring, and controlling your organization's credit risk exposure. 'de Servigny and Renault have written a valuable reference book on the analytics of credit markets. Theory and data are integrated seamlessly throughout the manuscript. The mathematical treatment is complete, though not overbearing. The economics, pricing, structuring and capital allocation aspects are artfully combined into a coherent whole' - Jamil Baz, Global Head of Fixed Income Research, Deutsche Bank.' This is much more than just a 'how to' book - it is analytically complete in that it looks at the microeconomics of industry structure to understand why credit risks have to be measured and monitored as well as being comprehensive in covering all the different approaches used to monitor and measure credit risk' - Bunt Ghosh, Global Head of Fixed Income Research, Credit Suisse First Boston. 'This extensive work, really clear while dealing with sophisticated methodologies, is right in the heart of today's concerns' - Jean-Pierre Mustier, CEO, SG Corporate and Investment Banking. "de Servigny and Renault provide a comprehensive treatment of all aspects of modern credit risk measurement, management, and mitigation, not only for large corporations but also for retail and small business (with an excellent chapter on credit scoring).This book is an absolute must for both academics and risk professionals, especially those struggling with the implementation of Basel II' - Michel Crouhy, Head of Business Analytic Solutions, Canadian Imperial Bank of Commerce. Fast-changing regulations, transformative technologies, and today's go-for-broke business mentality present investment banks and other lenders with default problems that are both unprecedented and daunting. To keep pace with this change, finance professionals are finding they must continually review and upgrade their credit risk management tools and techniques. "The Standard & Poor's Guide to Measuring and Managing Credit Risk" takes you far beyond the Basel guidelines to detail a powerful, proven program for understanding and controlling your firm's credit risk.Providing hands-on answers on practical topics from capital management to correlations, and supporting its theories with discerning data and insights, this authoritative book examines every key aspect of credit risk, including: determinants of credit risk and pricing/spread implications; quantitative models for moving beyond Altman's Z score to separate "good" borrowers from "bad"; key determinants of loss given default, and potential links between recovery rates and probabilities of default; measures of dependency including linear correlation, and the impact of correlation on portfolio losses; a detailed review of five of today's most popular portfolio models - CreditMetrics, CreditPortfolioView, Portfolio Risk Tracker, CreditRisk+, and Portfolio Manager; how credit risk is reflected in the prices and yields of individual securities; and, how derivatives and securitization instruments can be used to transfer and repackage credit risk? Today's credit risk measurement and management tools and techniques provide organizations with dramatically improved strength and flexibility, not only in mitigating risk but also in improving overall financial performance. "The Standard & Poor's Guide to Measuring and Managing Credit Risk" introduces and explores each of these tools, along with the rapidly evolving global credit environment, to provide bankers and other financial decision-makers with the know-how to avoid excessive credit risk where possible - and mitigate it when necessary.

Measuring and Managing Credit Risk

BOOKS Advanced financial risk management : tools and techniques for integrated credit risk and interest rate risk management / Donald R. van Deventer, Kenji Imai, Mark Mesler HG1615.25 .V23 Corporate finance / Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe HG4026 .R67 Corporate finance : theory and practice / Pierre Vernimmen ... [et al.] HG4011 .C67 Corporate governance : accountability, enterprise, and international comparisons / edited by Kevin Keasey, Steve Thompson, and Mike Wright HD2741 .C67 Essentials of financial risk management / Karen A. Horcher HD61 .H67 Finance and accounting for business / Bob Ryan HG4001 .R83 Management of financial services / V. K. Bhalla HG187.I4 .B43 Practical financial management / William R. Lasher HG4026 .L37 The Wall Street journal : guide to the business of life / Nancy Keates REF HG179 .K43

Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management

Introduction 1. The Objectives of the Credit Risk Process 2. The Asian Crisis: Lessons for Maximizing Risk adjusted Shareholder Value 3. The Evolution of Credit Modeling Techniques 4. Credit Risk Models: The Impact of Macro Factors on the Risk of Default 5. Internal Ratings and Approaches to Testing Credit Models 6. Tests of Credit Models using Historical Default Data 7. Market Data Tests of Credit Models: Lessons from Enron and Other Case Studies 8. Out of Sample Testing of Credit Models 9. Implications of the Tests for the Basel Accords and Management of Financial Institutions 10. Measuring Safety and Soundness and Capital Allocation Using the Merton and Reduced Form Models 11. Impact of Collateral on Valuation Models 12. Pricing and Valuing Revolving Credit and Other Loan Agreements 13. Credit Derivatives and Collateralized Debt Obligations 14. Future Developments in Credit Modeling Index

Credit risk models and the Basel Accords

This is the book I wish I had written.''--Robert D. Selvaggio, PhD., Director, FixedIncome and Mortgage Research, The Chase Manhattan Bank, N.A. Financial Risk Analytics is the first book written by experienced risk managers that integrates interest rate risk, credit risk, FX risk and capital allocation using a consistent risk management approach. It explains, in detailed yet understandable terms, the analytics of interest rate risk, credit risk, foreign exchange risk and capital allocation from A to Z. This book bridges the gap between the idealized assumptions used for valuation and the realities that must be reflected in management actions, and includes: The basics of present value, forward rates and interest rate compounding; American fixed income options vs. European options; The wide variety of alternatives term structure models to the basic Vasicek model.

Kenji Imai

Papers

Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management

Credit risk models and the Basel Accords

Financial Risk Analytics: A Term Structure Model Approach for Banking, Insurance, and Investment Management

Advanced Financial Risk Management, Second Edition: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management

Mortgage‐Backed Securities and Asset‐Backed Securities