Quotation Hochreiter, Ronald, Wozabal, David. 2009. Evolutionary Approaches for Estimating a Coupled Markov Chain Model for Credit Portfolio Risk Management. Lecture Notes in Computer Science 5484 193-202.


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Abstract

The analysis and valuation of structured credit products gained significant importance during the sub-prime mortgage crisis in 2007. Financial companies still hold many products for which the risk exposure is unknown. The Coupled Markov Chain approach can be used to model rating transitions and thereby default probabilities of companies. The likelihood of the model turns out to be a non-convex function of the parameters to be estimated. Therefore heuristics are applied to find the ML estimators. In this paper, we outline the model and its likelihood function, and present a Particle Swarm Optimization algorithm, as well as an Evolutionary Optimization algorithm to maximize this likelihood function. Numerical results conclude the paper.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Lecture Notes in Computer Science (LNCS)
WU-Journal-Rating new STRAT-C
Language English
Title Evolutionary Approaches for Estimating a Coupled Markov Chain Model for Credit Portfolio Risk Management
Volume 5484
Year 2009
Page from 193
Page to 202
Reviewed? Y
URL http://portal.acm.org/citation.cfm?id=1533596

Associations

People
Hochreiter, Ronald (Details)
External
Wozabal, David
Organization
Institute for Statistics and Mathematics IN (Details)
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