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    Quantitative Research

    Quantitative Research


    The use of carrier approximation methods for projected capital metrics with an application to the IFRS 17 risk adjustment.

    In this paper we explore the use of the carrier approximation for the multi-year projection of risk and capital metrics. Through an annuity book run-off case study we outline the key factors influencing the performance of the carrier method when applied to the projected IFRS 17 risk adjustment and the projected Solvency II solvency capital ratio (SCR).

    August 2019
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    Moody's Analytics Webinar: Topics@CreditEdge – Dealing With Fallen Angel Risk

    Fallen Angel risk results from the possibility and price impact of bond downgrades from investment grade (IG) into high yield (HY).

    June 2019
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    Dealing With Fallen Angel Risk

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

    May 2019
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    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
    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
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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

    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

    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

    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

    Validating and Understanding a Highly Nonlinear Machine Learning Model

    In validating a highly nonlinear model, a traditional nonlinear model provides a useful reference.

    November 2018
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    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
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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