- Counterparty Credit Risk
- Economic Capital and Credit Risk
- Risk Management - General
- Valuation and Structured Credit
A Multi-Factor Bottom-Up Model for Pricing Credit Derivatives
Tsui, L. K., 2011: A Multi-Factor Bottom-Up Model for Pricing Credit Derivatives. Journal of Computational Finance, forthcoming.
In this paper we continue the study of the stress event model, a simple and intuitive dynamic model for credit risky portfolios, proposed by Duffie and Singleton (1999). The model is abottom-up version of the multi-factor portfolio credit model [..]
Credit Valuation Adjustment
RiskMinds USA
Boston, MA
June 17, 2011
Rethinking Valuations: The Credit Crisis, Illiquid Markets and Model Risk
Rosen D., 2010, Re-Thinking Valuation: The Credit Crisis, Illiquid Markets and Model Risk, Chapter 33 in “Rethinking Risk Measurement and Reporting: Uncertainty, Bayesian Analysis and Expert Judgement”, Klaus Böcker Editor, Riskbooks
In this chapter, we discuss several lessons and best practices that we are relearning as the global banking system copes with the legacy of the crisis. Given the inevitable limitations of our models, we stress the importance of a model risk and scenario analysis framework. While the main points are general, we focus on examples of the credit crisis and, in particular, industry experience in the area of structured finance. [..]
Pricing, Hedging and Managing the Risk of Structured Finance Portfolios
RiskMinds USA
Boston, MA
June 16, 2011
Valuation of Structured Finance Products with Implied Factor Models
Nedeljkovic J., Rosen D. and Saunders D., 2011, Valuation of Structured Finance Products with Implied Factor Models, in Credit Risk Frontiers: Subprime Crisis, Pri.ing and Hedging, CVA, MBS, Ratings, and Liquidity, T. Bielecki, D. Brigo, F. Patras (Editors), Wiley
The recent credit crisis has highlighted limitations of the industry’s general understanding and risk management practices of structured credit portfolios. Market participants clearly misunderstood and underestimated the risks in many securities, especially with respect to the default correlation, systematic risk and contagion effects. In particular, pricing models [..]
Credit Risk Contributions
Rosen D., and Saunders D., 2011, Credit Risk Contributions, Chapter 22 in Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity, T. Bielecki, D. Brigo, F. Patras (Editors), Wiley, 2011
Once the risk of a portfolio is calculated, a natural question to ask is: where does the risk come from and what are the main contributors? We present a survey of the theory and practical uses of risk contributions in credit risk management. Applications presented include the computation of portfolio credit risk and the contributions of systematic and [..]
Lessons From the Crisis
SCI Conference, New York City
March 2011
Counterparty Credit Risk Workshop
IAFE Workshop, New York City
January 2011
Rethinking Valuations
RiskMinds, Geneva, Switzerland
December 2010
Pricing Counterparty Risk at the Trade Level and CVA Allocations
Pykhtin M., Rosen D., 2010, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board.
We address the problem of allocating the counterparty-level credit valuation adjustment (CVA) to the individual trades composing the portfolio. We show that this problem can be reduced to calculating contributions of the trades to the counterparty-level expected exposure (EE) conditional on the counterparty’s default. We propose a methodology for calculating [...]
Pricing and Hedging Collateralized Loan Obligations with Implied Factor Models
Nedeljkovic, J., Rosen, D. and Saunders, D. , 2010, The Journal of Credit Risk, 6 (3), pp. 53–97.
The current financial crisis has highlighted the need for transparent and robust methods for valuing and hedging structured credit portfolios. First-generation models such as Gaussian copula-based methods have documented practical and theoretical limitations well. In this paper we demonstrate the practical application of the weighted Monte Carlo methodology [...]
Effective Modelling of CCR Capital and Alpha in Basel II
Garcia Cespedes J. C., de Juan Herrero J. A., Rosen D., Saunders D., 2010, Journal of Risk Model Validation 4(1), pp.71-98.
In this paper, we present a computationally efficient approach to modeling wrong way risk and estimating counterparty credit risk capital and alpha. The methodology fully leverages existing couterparty exposure simulations used for risk management [...]
Risk Contributions of Systematic Factors in Portfolio Credit Risk Models
Rosen D. and Saunders D., 2010, Journal of Banking and Finance 34(2010), pp 336-349.
Determining contributions to overall portfolio risk is an important topic in risk management. For positions (instruments and sub-portfolios), this problem has been well studied, and a significant theory built, around the calculation of marginal contributions. We consider the problem of determining [..]
Pricing, Hedging and Managing the Risk of CLO Portfolios: From NAV to Monte Carlo Models
RI$KMINDS USA 2010, Boston, May 12, 2010
Some Remarks on CVA and Counterparty Credit Risk Measurement
Moody’s Credit Conference, New York University, May 14, 2010
Structured Finance Valuation: Best Practices and Advanced Methods
Frankfurt, May 6, 2010
Practical Modeling of the Incremental Risk Charge (IRC)
RISK Training, New York, April 26, 2010
Calculating CVA at the Trade Level and CVA Contributions
Fields Institute, Toronto, April 16, 2010
Integrated Views of Risk and Capital… after the Crisis
ERM Symposium, Chicago, April 2010
Practical Modeling of the Incremental Risk Charge (IRC)
ICBI Risk Minds Conference, Geneva, Switzerland, December 9, 2009
Valuing CDOs of Bespoke Portfolios with Implied Systematic Factor Models
Rosen D. and Saunders D., 2009, Journal of Credit Risk, 5(3).
This paper presents a robust and practical CDO valuation framework based on the application of multi-factor credit models in conjunction with weighted Monte Carlo techniques used in options pricing. The general factor framework produces arbitrage-free prices and can be used to [...]
Analytic Methods for Hedging Sytematic Credit Risk with Linear Factor Portfolios
Rosen D. and Saunders D., 2009, Journal of Economic Dynamics and Control, 33(1), pp 37-52.
Multi-factor credit portfolio models are used widely today for managing economic capital and pricing collateralized debt obligations (CDOs) and asset-backed securities. Commonly,practitioners allocate capital to the portfolio components(sub-portfolios, counterparties, or transactions). The hedging of credit risk is generally also focused [...]
Economic Capital
Rosen D. and Saunders D., 2009, Encyclopedia of Quantitative Finance.
This paper gives an overview of Economic Capital and surveys the methods for its calculation, including top–down and bottom–up approaches.
Computing and Stress Testing Counterparty Credit Risk Capital
Rosen D. and Saunders D. 2009, Counterparty Credit Risk (E. Canabarro, Editor), Risk Books, London, Chapter 11 pp. 245-292.
This chapter presents a practical example of computing and stress testing CCR capital and alpha in a realistic trading book. We discuss the methodological and computational challenges one faces when modeling CCR capital and when implementing [...]
Valuation of Structured Credit Portfolios: Beyond the Crisis
IAFE Seminar, New York, January 22, 2009
Engineering, Innovation & Entrepreneurship – It is all about Risk
ITAM conference, Mexico, August 27, 2008
Economic Credit Capital Allocation and Risk Contributions
Mausser H. and Rosen D., 2008, Handbook of Financial Engineering (J. Birge and V. Linetsky Editors) Chapter 16, pp 681-726.
This chapter provides a practical overview of the measurement of economic credit capital contributions and their application to capital allocation. We discuss the advantages and disadvantages of various risk measures and models, the interpretation of [...]
Industry Trends on Risk Technology: Impact of the Credit Crisis
Oliver Wyman Symposium on Practical Solutions in Risk Technology, New York, May 8, 2008
Enterprise-wide Asset and Liability Management: Issues, Institutions, and Models
Rosen D. and Zenios S., 2006, Handbook of Asset and Liability Management, Handbooks in Finance, North-Holland Chapter 1 pp 2-17.
Enterprise risk management aligns a firm’s business strategy with the risk factors of its environment in pursuit of business objectives. It is considered a well-grounded management strategy for corporations. The management of assets and liabilities [...]
A Simple Multi-Factor “Factor Adjustment” for Credit Capital Diversification
Garcia Cespedes J. C., Keinin A., de Juan Herrero J. A. and Rosen D., 2006, Journal of Credit Risk, (2)3.
We present a simple adjustment to the single-factor credit capital model, which recognizes the diversification from a multi-factor model. We introduce the concept of a diversification factor at the portfolio level, and show that [...]
Scenarios-Based Risk Management Tools
Mausser H. and Rosen D, 2005, Chapter 27 of Applications of Stochastic Programming (Wallace S.W. and Ziemba W.T. Editors), MPS-SIAM – Series in Optimization, pp. 545-574.
Risk management requires tools that identify a portfolio’s most significant sources of risk and that indicate how potential trades can improve the trade-off between risk and reward. These tools [...]
Modelling Stochastic Counterparty Exposures in Derivatives Portfolios
De Prisco B. and Rosen D., 2005, Counterparty Credit Risk Modelling (M. Pykhtin, Editor), Risk Books, London, pp. 3-48.
This chapter presents a general overview of current counterparty exposure measurement practices and recent modelling advances. Our focus is on a cohesive presentation of the quantitative modelling aspects of counterparty exposures and mitigation techniques as well [...]
Integrating Risk and Finance
Pouquery P., Rosen D., 2004, IBM and Algorithmics technical paper.
Typically, financial institutions’ risk and finance functions and systems have been developed separately, and with different objectives. Today, industry best practices are recognizing the need for more robust, integrated [...]
Calculating Credit Risk Capital
Rosen D., 2004, Chapter III.B.6 of Professional Risk Manager Handbook (C. Alexander and E. Sheedy eds.), Professional Risk Managers International Association (PRMIA), pp.13-42
Topics covered in this chapter include:
• how credit portfolio models must be defined and parameterised consistently to measure ECC from a bottom-up approach;
• the basic rules for computing minimum credit capital under [...]
Capital Allocation and RAPM
Aziz A., Rosen D., 2004, Chapter III.0 of Professional Risk Manager Handbook (C. Alexander and E. Sheedy eds.), Professional Risk Managers International Association (PRMIA), pp. 315-342.
Topics covered in this chapter include:
• the role of capital in financial institutions and the different types of capital;
• the key concepts and objectives behind regulatory capital, as well [...]
Simulation-Based Risk Management Systems for Hedge Funds
Burmeister C., Mausser H., Rosen D., 2003, Chapter 23 of The New generation of Risk Management for Hedge Funds and Private Equity Investments (Lars Jaeger, Editor), Euromoney Books, London, pp. 347-367.
The alternative investment strategies (AIS) used by hedge funds place many demands on a risk management system. This article proposes a simulation-based system, which [...]
Applying Portfolio Credit Risk Models to Retail Portfolios
Bucay, N. and D. Rosen, 2003, Frontiers in Credit Risk (Gaeta G., Alibhai S., Hingorani J., Editors), Wiley, pp. 313-357.
We present a simulation-based model to estimate the credit loss distribution of retail loan portfolios and apply the model to a sample credit card portfolio of a North American financial institution.
Building a Credit Risk Valuation Framework for Loan Instruments
Aguais S., Forest L., Rosen D., 2000, Commercial Lending Review,16(4), pp. 12-30.
We present a general option-valuation framework for loans that provides valuation
information at loan origination and supports mark-to-market analysis, portfolio
credit risk and asset and liability management for the entire portfolio. We
describe, in detail, the main structures found in [...]
Efficient Risk/Return Frontiers for Credit Risk
Mausser H. and Rosen D., 2000, Journal of Risk Finance, (2)4.
We construct efficient frontiers for relevant measures of credit risk, including expected shortfall, maximum (percentile) losses and unexpected (percentile) losses, and show that minimum-variance portfolios are markedly inefficient with respect to these measures. Since risk measures such as maximum losses and unexpected losses are intractable in an [...]
The Practice of Portfolio Replication: A Practical Overview of Forward and Inverse Problems
Dembo, R. and Rosen D., 1999, in Annals of Operations Research, 85, pp. 267-284.
Portfolio replication has proven in practice its applicability to enterprise-wide risk problems such as static hedging in complete and incomplete markets and markets that gap; strategic asset and capital allocation; benchmark tracking; design of synthetic products; and portfolio compression. In contrast to mean-variance optimization, the scenario [...]
Applying Scenario Optimization to Portfolio Credit Risk
Mausser H. and Rosen D, 1999, Algo Research Quarterly, 2 (2), pp. 51-60.
Standard market risk optimization tools, based on assumptions of normality, are ineffective for credit risk. In this paper, we develop three scenario optimization models for portfolio credit risk. We first create the trade risk profile and find the best hedge position for a single asset [...]