Credit Risk Analytics

This book endeavors to close the gap that exists between academic and practitioner published material on credit risk. While it showcases what has happened in the United States in particular since the mid 2000’s, it extends the discussion into other areas of the globe. In the wake of the subprime credit market meltdown and the ensuing financial crisis, worldwide reserves traced the root of toxic assets to excessive risks in financial transactions. However, those risks were assumed by counter-parties due to directions signaled by fiscal and monetary policies and optimistic projections in the financial models. The author contends that these models were designed for short-term win-win scenarios and at times with disregard to supporting arguments from economics and econometrics. Specifically, he tackles the factors that contributed to the collapse of the credit industry, leveraging economics, econometrics, and programming to illustrate better designed credit risk models that should have been adopted to avert or minimize losses. Each model is subjected to stringent testing and "common sense" validation thereby providing a complete and understandable audit trail. The book essentially empowers analysts to challenge the logic behind every transaction that lands on his or her desk, from public policies to private loans. Some mathematical justifications are given where appropriate. All data files are freely available on an author-maintained web site. Excel/VBA, SAS Base/Enterprise Guide, and Loan Performance™ from CoreLogic are employed throughout.