The credit risk(+) model with general sector correlations

We consider an enhancement of the credit risk+ model to incorporate correlations between sectors. We model the sector default rates as linear combinations of a common set of independent variables that represent macro-economic variables or risk factors. We also derive the formula for exact VaR contributions at the obligor level.

Can a single resource support many consumer species

The conclusion that the number of species co-existing within a biological community cannot exceed the number of limiting factors is not valid if we assume that (i) the relative efficiency of two competing species in utilizing a resource is not independent of the resource density, but one species may be more efficient at a lower density and less efficient at a higher density and (ii) there is a spatial or temporal heterogeneity in the density of the resource. This spatial or temporal heterogeneity does not have to be furnished by factors external to the biological community, but may be generated within the biological community itself as in the case of a vertical gradient of light in a plant community. This possibility of a stable co-existence of more than one species in a community limited by a single resource, even when the resource is being supplied uniformly in space and time, is formally demonstrated.

Application of nonlinear filtering to credit risk

Merton's model views equity as a call option on the asset of the firm. Thus the asset is partially observed through the equity. Then using nonlinear filtering an explicit expression for likelihood ratio for underlying parameters in terms of the nonlinear filter is obtained. As the evolution of the filter itself depends on the parameters in question, this does not permit direct maximum likelihood estimation, but does pave the way for the `Expectation-Maximization' method for estimating parameters. (C) 2010 Elsevier B.V. All rights reserved.

New Ventures’ influence on the Growth of SME Employment, Production and Exports in India: Does Institutional Credit matter?

New ventures are considered to be a major source of small firm growth. In Indian context the contribution of new ventures in terms of new employment, production and exports has largely remained unexplored. It is equally important and unexplored, the significance of the contribution of bank credit to the growth of new ventures in India. This paper is an attempt to throw light on these two aspects. The research is based on secondary data of the liberalized period provided by Ministry of Micro, Small and Medium Enterprises, Government of India and Reserve Bank of India. To analyze the influence of bank credit growth on new ventures and the influence of new ventures on growth of additional employment, additional production and additional exports, we used a Bi-Variate Vector Auto Regression. Based on the model generated, Granger causality tests are conducted to obtain the results. The study found that rate of growth of bank credit causes the number of new ventures, implying any increase in the rate of growth of bank credit will be beneficial to the growth of new ventures. The study also concluded that new ventures are not causing the growth of additional employment or additional production. However new ventures cause the growth of additional exports. This is reasonable as entrepreneurs start their new ventures with minimum possible employment and relatively low rate of capacity utilization and they come up to take advantage of the process of globalization by catering to the international market.

Pricing credit derivatives

The financial crisis set off by the default of Lehman Brothers in 2008 leading to disastrous consequences for the global economy has focused attention on regulation and pricing issues related to credit derivatives. Credit risk refers to the potential losses that can arise due to the changes in the credit quality of financial instruments. These changes could be due to changes in the ratings, market price (spread) or default on contractual obligations. Credit derivatives are financial instruments designed to mitigate the adverse impact that may arise due to credit risks. However, they also allow the investors to take up purely speculative positions. In this article we provide a succinct introduction to the notions of credit risk, the credit derivatives market and describe some of the important credit derivative products. There are two approaches to pricing credit derivatives, namely the structural and the reduced form or intensity-based models. A crucial aspect of the modelling that we touch upon briefly in this article is the problem of calibration of these models. We hope to convey through this article the challenges that are inherent in credit risk modelling, the elegant mathematics and concepts that underlie some of the models and the importance of understanding the limitations of the models.

Decentralized demand-supply matching using community microgrids and consumer demand response: A scenario analysis

Developing countries constantly face the challenge of reliably matching electricity supply to increasing consumer demand. The traditional policy decisions of increasing supply and reducing demand centrally, by building new power plants and/or load shedding, have been insufficient. Locally installed microgrids along with consumer demand response can be suitable decentralized options to augment the centralized grid based systems and plug the demand-supply gap. The objectives of this paper are to: (1) develop a framework to identify the appropriate decentralized energy options for demand supply matching within a community, and, (2) determine which of these options can suitably plug the existing demand-supply gap at varying levels of grid unavailability. A scenario analysis framework is developed to identify and assess the impact of different decentralized energy options at a community level and demonstrated for a typical urban residential community Vijayanagar, Bangalore in India. A combination of LPG based CHP microgrid and proactive demand response by the community is the appropriate option that enables the Vijayanagar community to meet its energy needs 24/7 in a reliable, cost-effective manner. The paper concludes with an enumeration of the barriers and feasible strategies for the implementation of community microgrids in India based on stakeholder inputs. (C) 2014 Elsevier Ltd. All rights reserved.