Standard approach to low default portfolio (LDP) probability of default (PD) calibration is to ad... more Standard approach to low default portfolio (LDP) probability of default (PD) calibration is to add conservative add-on that should cover the gap with scarce default event data. The most prominent approaches to add-on calibration are based on an assumption about the level of the conservatism (quantile of default event distribution), but there is no transparent way to calibrate it or to relate the level of conservatism to a risk profile of the Bank. Over conservative assumptions can lead to undue shrinkage in LDP and negative shift in the overall risk-profile. Described in the paper PD calibration framework is based on Bayesian inference. The main idea is to calibrate conjugate prior using “closest†available portfolio (CPP) with reliable default statistics. The form of the prior, criteria for CPP selection, application of the approach to real life and artificial portfolios are described in the paper. The advantage of the approach is an elimination of the arbitrary “level of cons...
Despite the significant attention to the stress-testing issues in finances world-wide, the ways o... more Despite the significant attention to the stress-testing issues in finances world-wide, the ways of quantitative assessment of the stress impact on the portfolios of non-public (in the absence of equity or debt market quotes) corporate borrowers are currently not sufficiently developed or standardized. The aim of this article is to pro-pose high-level universal requirements to the quantitative models of stress-testing of non-public corporate borrower portfolios, and to describe the model, developed by the authors, which meets such requirements. Details of the model’s calibration, implemen-tation (using Monte-Carlo simulations) and some practical issues are covered in the article.
The intention of this paper is to propose PD calibration framework for low default portfolios (LD... more The intention of this paper is to propose PD calibration framework for low default portfolios (LDP) that allows producing smooth non-zero PD estimates for any given time horizon within the length of economic cycle. The approach produces PDs that are consistent with two main anchors – PIT and TTC PD estimates and are subject to smooth, monotonic transition between those two anchors. In practise, proposed framework could be applied to risk-based pricing of LDP portfolio deals. Moreover, according to the author opinion, the approach is generally compliant with the new IFRS 9 requirements regarding PD term-structure calibration for provisioning.
In the paper we propose PD calibration framework for LDP that allows producing smooth non-zero PD... more In the paper we propose PD calibration framework for LDP that allows producing smooth non-zero PD estimates for any given time horizon within the length of economic cycle. The advantages of the approach is that produced PDs are consistent with two main anchors-PIT and TTC PD estimates and are subject to smooth, monotonic transition between those two anchors. In practise, proposed framework could be applied to risk-based pricing of mid-term deals, whose duration is too long compared with PIT PD horizon and significantly shorter that the length of the whole economic cycle. Currently, there are two main approaches to probability of default (PD) calibration: so-called TTC (through-the cycle) and PIT (point-in-time), see details, for example, in [1], [5].
Pattern Recognition and Image Analysis, Dec 1, 2022
Cash management optimization is one of the most essential tasks for any bank, because it helps sa... more Cash management optimization is one of the most essential tasks for any bank, because it helps save a significant amount of money by reducing the cost of ATMs funding and encashment. This paper focuses on forecasting customer cash demand, which is one of the key components of the optimization system. Furthermore, for the first time, our research touches on the problem of nonstationarity, which is typical for real-world ATM data, and proposes a data preprocessing pipeline to tackle it. We proposed new forecasting methods in the paradigms of local and global models, proved their superiority over classical approaches to forecasting time series and approaches used specifically for the cash demand forecasting problem.
Financial Econometrics and Empirical Market Microstructure, 2014
Despite the significant attention to the stress-testing issues in finances worldwide , the ways o... more Despite the significant attention to the stress-testing issues in finances worldwide , the ways of quantitative assessment of the stress impact on the portfolios of non-public (in the absence of equity or debt market quotes) corporate borrowers are currently not sufficiently developed or standardized. The aim of this article is to propose high-level universal requirements to the quantitative models of stress-testing of non-public corporate borrower portfolios, and to describe the model, developed by the authors, which meets such requirements. Details of the model's calibration, implementation (using Monte-Carlo simulations) and some practical issues are covered in the article.
Standard approach to low default portfolio (LDP) probability of default (PD) calibration is to ad... more Standard approach to low default portfolio (LDP) probability of default (PD) calibration is to add conservative add-on that should cover the gap with scarce default event data. The most prominent approaches to add-on calibration are based on an assumption about the level of the conservatism (quantile of default event distribution), but there is no transparent way to calibrate it or to relate the level of conservatism to a risk profile of the Bank. Over conservative assumptions can lead to undue shrinkage in LDP and negative shift in the overall risk-profile. Described in the paper PD calibration framework is based on Bayesian inference. The main idea is to calibrate conjugate prior using “closest†available portfolio (CPP) with reliable default statistics. The form of the prior, criteria for CPP selection, application of the approach to real life and artificial portfolios are described in the paper. The advantage of the approach is an elimination of the arbitrary “level of cons...
Despite the significant attention to the stress-testing issues in finances world-wide, the ways o... more Despite the significant attention to the stress-testing issues in finances world-wide, the ways of quantitative assessment of the stress impact on the portfolios of non-public (in the absence of equity or debt market quotes) corporate borrowers are currently not sufficiently developed or standardized. The aim of this article is to pro-pose high-level universal requirements to the quantitative models of stress-testing of non-public corporate borrower portfolios, and to describe the model, developed by the authors, which meets such requirements. Details of the model’s calibration, implemen-tation (using Monte-Carlo simulations) and some practical issues are covered in the article.
The intention of this paper is to propose PD calibration framework for low default portfolios (LD... more The intention of this paper is to propose PD calibration framework for low default portfolios (LDP) that allows producing smooth non-zero PD estimates for any given time horizon within the length of economic cycle. The approach produces PDs that are consistent with two main anchors – PIT and TTC PD estimates and are subject to smooth, monotonic transition between those two anchors. In practise, proposed framework could be applied to risk-based pricing of LDP portfolio deals. Moreover, according to the author opinion, the approach is generally compliant with the new IFRS 9 requirements regarding PD term-structure calibration for provisioning.
In the paper we propose PD calibration framework for LDP that allows producing smooth non-zero PD... more In the paper we propose PD calibration framework for LDP that allows producing smooth non-zero PD estimates for any given time horizon within the length of economic cycle. The advantages of the approach is that produced PDs are consistent with two main anchors-PIT and TTC PD estimates and are subject to smooth, monotonic transition between those two anchors. In practise, proposed framework could be applied to risk-based pricing of mid-term deals, whose duration is too long compared with PIT PD horizon and significantly shorter that the length of the whole economic cycle. Currently, there are two main approaches to probability of default (PD) calibration: so-called TTC (through-the cycle) and PIT (point-in-time), see details, for example, in [1], [5].
Pattern Recognition and Image Analysis, Dec 1, 2022
Cash management optimization is one of the most essential tasks for any bank, because it helps sa... more Cash management optimization is one of the most essential tasks for any bank, because it helps save a significant amount of money by reducing the cost of ATMs funding and encashment. This paper focuses on forecasting customer cash demand, which is one of the key components of the optimization system. Furthermore, for the first time, our research touches on the problem of nonstationarity, which is typical for real-world ATM data, and proposes a data preprocessing pipeline to tackle it. We proposed new forecasting methods in the paradigms of local and global models, proved their superiority over classical approaches to forecasting time series and approaches used specifically for the cash demand forecasting problem.
Financial Econometrics and Empirical Market Microstructure, 2014
Despite the significant attention to the stress-testing issues in finances worldwide , the ways o... more Despite the significant attention to the stress-testing issues in finances worldwide , the ways of quantitative assessment of the stress impact on the portfolios of non-public (in the absence of equity or debt market quotes) corporate borrowers are currently not sufficiently developed or standardized. The aim of this article is to propose high-level universal requirements to the quantitative models of stress-testing of non-public corporate borrower portfolios, and to describe the model, developed by the authors, which meets such requirements. Details of the model's calibration, implementation (using Monte-Carlo simulations) and some practical issues are covered in the article.
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Papers by Denis Surzhko