tailieunhanh - An EVT primer for credit risk

JFRAC received a total of 17 surveys from member authorities, representing 26 separate agencies from 12 different countries, as well as five responses describing international frameworks. A list of survey respondents is set forth in Appendix 4. This report is intended to serve as a stocktaking of member authorites’ use of credit ratings. This stocktaking is based entirely on the responses received from member authorities in response to the questionnaire circulated by JFRAC and, with the exception of the descriptions of international frameworks prepared by member authorities, does not address the use of credit ratings in any other jurisdictions | An EVT primer for credit risk Valerie Chavez-Demoulin Paul Embrechts EPF Lausanne Switzerland ETH Zurich Switzerland First version December 2008 This version May 25 2009 Abstract We review from the point of view of credit risk management classical Extreme Value Theory in its one-dimensional EVT as well as more-dimensional MEVT setup. The presentation is highly coloured by the current economic crisis against which background we discuss the non- usefulness of certain methodological developments. We further present an outlook on current and future research for the modelling of extremes and rare event probabilities. Keywords Basel II Copula Credit Risk Dependence Modelling Diversification Extreme Value Theory Regular Variation Risk Aggregation Risk Concentration Subprime Crisis. 1 Introduction It is September 30 2008 . CET. Our pen touches paper for writing a first version of this introduction just at the moment that European markets are to open after the US Congress in a first round defeated the bill for a USD 700 Bio fund in aid of the financial 1 industry. The industrialised world is going through the worst economic crisis since the Great Depression of the 1930s. It is definitely not our aim to give an historic overview of the events leading up to this calamity others are much more competent for doing so see for instance Crouhy et al. 13 and Acharya and Richardson 1 . Nor will we update the events now possible in real time of how this crisis evolves. When this article is in print the world of finance will have moved on. Wall Street as well as Main Street will have taken the consequences. The whole story started with a credit crisis linked to the American housing market. The so-called subprime crisis was no doubt the trigger the real cause however lies much deeper in the system and does worry the public much much more. Only these couple of lines should justify our contribution as indeed two words implicitly jump out of every public communication on the .