Quantitative Research

Article
illuminated charts and graphs

Dealing With Fallen Angel Risk

We test the early warning power of the CreditEdge Deterioration Probability (DP) metric for Fallen Angel downgrades.

May 2019

Article
Stock Market Graph and Bar Chart

Earnings Volatility, Share Price Performance, and Credit Portfolio Management Under CECL and IFRS 9

This paper studies how earnings volatility induced by credit risk can impact share price performance for financial institutions under CECL and IFRS 9, and quantifies the benefit of an active credit risk management practice.

April 2019
Dr. Amnon Levy , Xuan Liang, Dr. Pierre Xu

Webinar-on-Demand
Business and financial report

Moody's Analytics Webinar: RiskFrontier™ 5.3 and 5.4 Release and GCorr™ 2018 Update

Moody's Analytics is pleased to announce the release of versions 5.3 and 5.4 of the RiskFrontier software. The latest version includes the following enhancements:

February 2019
Atit Wongnophadol, Yiting Xu,  Nihil Patel

Webinar-on-Demand
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Moody's Analytics Webinar: Topics@CreditEdge Navigating Choppy Markets - Focus on Asia

Since the Asia crisis, most countries in Asia have displayed a longer term secular trend of falling default risk.

February 2019

Whitepaper
sovereign

Sovereign & Size-Adjusted EDF-Implied Rating Template (for Private Firms)

RiskCalc™ EDF™ (Expected Default Frequency) values and agency ratings are widely used credit risk measures. RiskCalc EDF values typically measure default risk for private companies, while agency ratings are only available for rated companies. A RiskCalc EDF value measures a company's standalone credit risk based on financial statement information, while an agency rating considers qualitative factors such as Business Profile, Financial Policy, external support, and country-related risks. Moody's Analytics new Sovereign & Size-Adjusted EDF-Implied Rating Template combines RiskCalc EDF values with additional factors to provide a rating comparable to agency ratings for private companies. The new template applies to RiskCalc EDF values across numerous geographies and regulatory environments. With the new template, users can generate a rating more comparable to an agency rating than RiskCalc EDF values or EDF-implied ratings. Analyzing data from 3,900+ companies in 60+ countries, we find that sovereign rating and total asset size, in addition to EDF value, have a statistically significant impact on an agency rating — our quantitative template incorporating these three variables reliably estimates agency ratings in a robust fashion.

December 2018
Maria Buitrago, Uliana Makarov,  Dr. Janet ZhaoDr. Douglas Dwyer

Whitepaper
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Identifying At-Risk Names in Your Private Firm Portfolio — RiskCalc Early Warning Toolkit

This report outlines a practical approach for using RiskCalc EDF credit measures to effectively monitor large portfolios of private firms and to proactively identify at-risk names. The RiskCalc Early Warning Toolkit Excel add-in is an easy to use, yet comprehensive tool that allows users to focus costly and scarce resources on a highly targeted selection of the most at-risk names in their portfolios. This research for private firms compliments previous research on Early Warning Toolkit for public firms. The Early Warning Toolkit identifies at-risk names within a private firm portfolio well before default, using a number of different EDF-related risk metrics.

November 2018
Ziyi Sun,  Dr. Janet Zhao , Gustavo Jimenez

Whitepaper

Equity-at-Risk and Transfer Pricing: Annualised Expected Loss versus Cumulative Expected Loss

This article is intended as guidance for transfer pricing professionals in Luxembourg who are considering the equity-at-risk following the calculation of a loan's expected loss when using Moody's Analytics tools. This article does not provide final decision-making processes, which remain at the discretion of the transfer pricing professional, according to the specific case. This article is intended to create elements of thought and paths to economically and financially sound results.

November 2018
Christophe Marinier

Whitepaper
Image of possible yield curve and equity evolution

Fast Projection of Reserve and Capital Requirements with Proxy Functions

An emerging business requirement for North American insurers is the ability to project forward stochastic reserve and capital requirements under various planning scenarios to a specific future date. In this paper we consider applying proxy functions to this task, using function fitting techniques described in our previous research paper Fitting Proxy Functions for Conditional Tail Expectation: Comparison of Methods.

October 2018
Aubrey Clayton,  Dr. Steven Morrison

Whitepaper
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August 2018 U.S. Middle Market Risk Report

Private firm default rates have declined steadily during the past five years. At 1.4%, the rolling 12-month default rate is down 74% from its September 2009 peak of 5.2%. This trend has been driven primarily by a decline in the charge-off rate, now at its lowest level in ten years. In addition, the percentage of borrowers in non-accrual status has decreased 56% since September 2009. The number of borrowers rated “Substandard” has seen a steady increase since the first quarter of 2016, above pre-crisis levels, reflecting banks' cautious lending practices.

August 2018
Irina Korablev, Lin Moon, Stephanie Yu

Whitepaper
Figure 1 illustrates the percentage of statements and defaults per year during 1998-2015 in CRD.

Features of a Lifetime PD Model: Evidence from Public, Private, and Rated Firms

With the new CECL and IFRS 9 requirements, we see an increased need for lifetime probability of default models. In this document, we formally investigate and summarize the term structure properties consistently seen across public, private, and rated firms. We observe that the default rate for “good” firms tends to increase over time, while the default rate for “bad” firms decreases over time, an indication of the mean-reversion effect seen with firms' default risk.

May 2018
Sajjad Beygiharchegani, Uliana Makarov,  Dr. Janet ZhaoDr. Douglas Dwyer

Whitepaper
Figure 7 CCM breakdown.

A Composite Capital Measure Unifying Business Decision Rules in the Face of Regulatory Requirements Under New Accounting Standards

Prudent credit risk management ensures institutions maintain sufficient capital and limit the possibility of a capital breach. With CECL and IFRS 9, the resulting trend toward greater credit earnings volatility raises uncertainty in capital supply, ultimately causing an increase in required capital. It is ever more challenging for institutions to manage their top-of-the house capital while steering their business to achieve the desired performance level. This paper introduces an approach that quantifies the additional capital buffer an institution requires, beyond the required regulatory minimum, to limit the likelihood of a capital breach. In addition, we introduce a new measure that allocates capital and recognizes an instrument's regulatory capital requirements, loss allowance, economic concentration risks, and the instrument's contribution to the uncertainty in capital supply and demand. In-line with the Composite Capital Measure introduced in Levy and Xu (2017), this extended measure includes far-reaching implications for business decisions. Using a series of case studies, we demonstrate the limitations of alternative measures and how institutions can optimize performance by allocating capital and making business decisions according to the new measure.

May 2018
Dr. Amnon Levy , Xuan Liang, Dr. Pierre Xu

Whitepaper
illuminated charts

Default Risk Premium in the Equity Market

This paper explores the default risk premium within the equity market. To our knowledge, this is the first study that uses the commercially-available structural model, Moody's Analytics Public Firm Model, EDF9TM, to explain the cross-section of stock returns. While distressed stocks have attracted attention in the past for their anomalously low returns, we also identify outperformance of “safe” stocks. The notions of safe and distressed are both defined in the context of Distance-to-Default within the Moody's Analytics Public Firm Model(also known as KMV). Our findings revisit the notion that value, size, and momentum price the financial distress risk. We find that safe stocks outperform the market, and risky stocks significantly anomaly, our factor is not a proxy for the low volatility factor.

April 2018
Houman Dehghan, Pooya Nazeran