This paper implements a simple and transparent procedure for setting loan-to-value (LTV) ratio based on the market risk of the underlying collateralized portfolio. The loan hair cut (i.e. 1-LTV) is closely related to value-at-risk (VaR) which is very sensitive to model assumptions and...

This paper explores whether factor based credit portfolio risk models are able to predict losses in severe economic downturns such as the recent Global Financial Crisis (GFC) within standard confidence levels. The paper analyzes (i) the accuracy of default rate forecasts, and (ii) whether...

We propose the use of partial myopia as an alternative approach to dynamic programming for solving a multi-period investment problem with background risks. An investor behaves partially myopically if the investor makes his decision as if his total wealth at the end of the next period will be...

This paper provides a strategy for portfolio risk management by inferring extreme movements in financial markets. The core of the provided strategy is a statistical model for the joint tail distribution that attempts to capture accurately the data generating process through an extremal modelling...

In this paper, we adopt a partial differential equation (PDE) approach to calculate price and risk measures for mortgage backed securities (MBS). The interest rate path-dependency is handled by an augmented state variable with discrete updating. Compared with the Monte Carlo method, valuation...