Credit risk refers to the possibility that a borrower will fail to meet their obligations and represents one of the key risks in the financial sector. Accurately estimating expected losses, especially during periods of stress, is essential for maintaining the stability of financial institutions.
We will introduce fundamental risk concepts, including risk measurement methods and basic definitions such as probability of default, loss given default, and exposure at default. Further, we will closely examine the Basel Accords, focusing particularly on the main requirements established by Basel III and introduce the concept of counterparty credit risk. For modeling dependencies among risk factors, we will apply copulas and define their main properties.
Finally, we will model the probability of default under various stress scenarios and analyse how changes in market factors affect the probability of default add-on. Based on our results, we will examine how risk-weighted assets differ across scenarios. Different copulas will allow us to model the dependencies between risk factors. We will investigate how different levels of correlation between risk factors and factor cutoff values affect the expected value of risk exposure.
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