This article outlines a framework for the analysis of extreme events based on forward-looking reverse stress testing. We carry out a portfolio simulation and identify stress scenarios which are critical for bank solvency as the ones contributing the most to cost of capital, as expressed by KVA...

Performance assessment of derivative pricing models revolves around a comparative model-risk analysis. From among the plethora of econometrically unrealistic models, the ones that survive Darwinian selection tend to generate systematic short term profits while exposing the bank to long term...

Frontmatter -- Advance Praise for Reverse Stress Testing in Banking -- Acknowledgements -- Foreword -- Contents -- Part I: Fundamentals of Reverse Stress Testing -- 1 Reverse Stress Testing: A Versatile Thinking Tool -- 2 Reverse Stress Testing in Banks -- 3 Reverse Stress Testing: An Overview...

By halting the LIBOR's publication, large volumes of fixed income securities, from loans to derivatives, will fall back to an alternative fixing reference. The initial proposal of a SOFR fallback eliminated any degree of subjectivity but opened up funding risk. Overlaying a credit spread over...

In the aftermath of the 2007 global financial crisis, banks started reflecting into derivative pricing the cost of capital and collateral funding through XVA metrics. XVA is a catch-all acronym whereby X is replaced by a letter such as C for credit, D for debt, F for funding, K for capital and...

In this paper, we prove that the conditional dependence structure of default times in the Markov model of "A Bottom-Up Dynamic Model of Portfolio Credit Risk. Part I: Markov Copula Perspective" belongs to the class of Marshall-Olkin copulas. This allows us to derive a factor representation in...

We devise simulation/regression numerical schemes for pricing the CVA on CDO tranches, where CVA stands for Credit Valuation Adjustment, or price correction accounting for the defaultability of a counterparty in an OTC derivatives transaction. This is done in the setup of a continuous-time...

In "Dynamic Hedging of Portfolio Credit Risk in a Markov Copula Model", the authors introduced a Markov copula model of portfolio credit risk where pricing and hedging can be done in a sound theoretical and practical way. Further theoretical backgrounds and practical details are developed in "A...