Credit Risk New Approaches to Value at Risk and Other Paradigms

Credit Risk New Approaches to Value at Risk and Other Paradigms Second Edition ANTHONY SAUNDERS LINDA ALLEN John Wiley & Sons, Inc. measurement saun_fpref.qxd 2/7/02 10:44 AM Page vi Credit Risk measurement saun_ffirs.qxd 2/7/02 10:37 AM Page i Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Aus- tralia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk

management, financial engineering, valuation and fi- nancial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. saun_ffirs.qxd 2/7/02 10:37 AM Page ii Credit Risk New Approaches to Value at Risk and Other Paradigms Second Edition ANTHONY SAUNDERS LINDA ALLEN John Wiley & Sons, Inc. measurement saun_ffirs.qxd 2/7/02 10:37 AM Page iii Copyright © 2002 by Anthony Saunders and Linda Allen. All rights reserved. Published by John Wiley & Sons, Inc., New York. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional person should be sought. This title is also available in print as ISBN 0-471-21910-X. Some content that appears in the print version of this book may not be available in this electronic edition. For more information about Wiley products, visit our web site at www.Wiley.com fcopyebk.qxd 2/28/02 10:05 AM Page IV v preface to second edition I t is quite astonishing that the state of the credit risk measurement art has progressed so far in just two years. Many of the models are entering their second generation. A consensus has developed about certain model param- eters and approaches. As is perhaps inevitable for a maturing body of knowledge, two schools of thought have emerged. One “school” traces its intellectual roots to Merton’s options theoretic approach and explains de- fault in structural terms related to the market value of the firm’s assets as compared to its debt obligations. The other “reduced form school” statisti- cally decomposes observed risky debt prices into...

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