G - Physics – 06 – Q
Patent
G - Physics
06
Q
G06Q 40/00 (2006.01)
Patent
CA 2326925
A method creates an adjusted credit risk transition matrix and related matrices. The method uses the steps of obtaining a real probability measure (P) transition matrix, and adjusting the (P) transition matrix to be consistent with default probabilities under martingale measure (Q) by making the last column (default probabilities) in the (P) transition matrix consistent with default probabilities calculated under (Q). The method further scales the other entries in the transition matrix (P) to compensate for the adjustment while retaining the relative weights among non- default classes from the (P) transition matrix in the adjusted transition matrix. A credit risk model for the analysis of complex credit instrument implements the method. The adjusted transition matrix may be for use in analysing complex credit instruments. The model may be implemented in computer software on a computer readable medium. The adjusted transition matrix may be used to price credit swaps or value credit instruments. The model may have a simulation engine to generate valuation scenarios based on the adjusted transition matrix. The simulation engine may generate scenarios based on a Monte Carlo method. The model may be extended for the risk analysis of complex portfolios of credit instruments with stochastic interest and foreign exchange rates. The model may have a Monte Carlo simulation engine to generate valuation scenarios based on the joint distribution of interest rates, spreads, foreign exchange rates and obligors' credit migrations consistent with obtained or adjusted (P) transition matrix.
Crouhy Michel
Im John
Nudelman Gregory
Tchernitser Alexei
Blake Cassels & Graydon Llp
Canadian Imperial Bank Of Commerce
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