Factor analysis of security returns aims to decompose a return covariance matrix into systematic and specific risk components. To date, most commercially successful factor analysis has been based on fundamental models, although there is a large academic literature on statistical models. While...

Risk management applications often require estimating the tail distribution of total default losses on a portfolio of credit-sensitive positions such as loans and corporate bonds. This paper develops, analyzes and tests an importance sampling estimator of large-loss probabilities. The estimator...

Stochastic point process models of event timing are common in many areas, including finance, insurance and reliability. Monte Carlo simula- tion is often used to perform computations for these models. The standard sampling algorithm, which is based on a time-change argument, is widely applicable...

This paper formulates and analyzes a discretization scheme for a jump-diffusion process with general state-dependent drift, volatility, jump intensity, and jump size. The jump times of the process are constructed as time-changed Poisson arrival times, and the Euler method is used to generate the...

Wrong way risk can be incorporated in Credit Value Adjustment (CVA) calculations in a reduced form model. Hull and White (2012) introduced a CVA model that captures wrong way risk by expressing the stochastic intensity of a counterparty's default time in terms of the financial institution's...