Evaluation of Credit Risk Models

Credit risk analysis has been attracting considerable attention from academics and professionals alike. There is now a considerable academic literature on models of credit defaults and spreads on corporate bonds. Most of these developments have been theoretical in nature, or have focussed on model construction. Important progress has also been made in empirical analysis of corporate bond spreads. But, due to the rare nature of defaults, evaluation of credit risk models has not made much progress. This is clearly an important research area with important implications for credit risk modelling. At CIMF we plan to pursue this topic by considering alternative approaches based on credit rating information and simulation-based stress testing of credit risk models.