Credit Portfolios, Credibility Theory, and Dynamic Empirical Bayes. (23rd December 2012)

• Record Type: Journal Article
• Authors: Lai, Tze Leung
• Other Names: Beg I. Academic Editor.; Scotto M. Academic Editor.
• Is Part Of: ISRN probability and statistics. Volume 2012(2012)
• Publication Date: 2012-12-23
• Subjects: Probabilities -- Periodicals; Mathematical statistics -- Periodicals; Mathematical statistics; Probabilities; Electronic journals; Periodicals; 519
• DOI: 10.5402/2012/832175
• Languages: English
• ISSNs: 2090-4711

Abstract

Abstract : We begin with a review of (a) the pricing theory of multiname credit derivatives to hedge the credit risk of a portfolio of corporate bonds and (b) current approaches to modeling correlated default intensities. We then consider pricing of insurance contracts using credibility theory in actuarial science. After a brief discussion of the similarities and differences of both pricing theories, we propose a new unified approach, which uses recent advances in dynamic empirical Bayes modeling, to evolutionary credibility in insurance rate-making and default modeling of credit portfolios.