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Quantitative Finance: Default Payment - Coggle Diagram
Quantitative Finance: Default Payment
Modelling Issues
Prepayment Risk
Monthly Prepayment Rate = (Refinance Incentive) x (Season Multiplier) x (Mont Multiplier) x (Burnout)
Fixed rate lending is prepaid, lenders are constantly refining their models to estimate prepayment risk.
Expected Loss
EL = PD x LGD x EAD
All credit portfolios make losses
2 Reason is Important
Can be divided into a now issue and future issues.
Future issues will be discussed in the problem loans section, which needs to be put capital side.
Probability of Default
P(d) = f(Liquidity Failure, Negative Equity)
A direct result of a lender's culture, policies, systems, and models.
Major task
Build a model that selection of variables for both micro and macro factors.
The Explanatory Variable
Explanatory Power
Forecastability
Stress Test versus Forecasting Model
Model Coverage
Data Availability
Correlation Among Variables
Representation and Coverage
Lose Given Default (LGD)
Variables for Loss
Types of Loan
Seniority
Collateral
Term
Seniority of Mortgage
Characteristics of Company's Liquidity
Level of Interest Rates
Concentration Risk
Sectoral Concentration
Breached
Asymptotic Single Risk Factor (ASRF)
the ASF model will be breached as it assumes that a single risk factor can affect the value of the portfolio.
Hefindahl - Hirschman index (HHI)
HHI measure the amount of concentration without reference to credit risk; in other words, the credit risk is homogeneous.
Name Risk
Breaches
Granularity Assumption
Basel adding risk to the portfolio by adding a new loan. The portfolio is not perfectly diversified
Sector concentration is broader than name risk
It can be across industries, jurisdiction or geography
