scholarly journals Risk Factor Evolution for Counterparty Credit Risk under a Hidden Markov Model

Risks ◽  
2019 ◽  
Vol 7 (2) ◽  
pp. 66
Author(s):  
Ioannis Anagnostou ◽  
Drona Kandhai
Keyword(s):  
Markov Model ◽  
Credit Risk ◽  
Exchange Rates ◽  
Hidden Markov Model ◽  
Regime Switching ◽  
Hidden Markov ◽  
Numerical Study ◽  
Commodity Prices ◽  
Counterparty Credit Risk ◽  
The Impact

One of the key components of counterparty credit risk (CCR) measurement is generating scenarios for the evolution of the underlying risk factors, such as interest and exchange rates, equity and commodity prices, and credit spreads. Geometric Brownian Motion (GBM) is a widely used method for modeling the evolution of exchange rates. An important limitation of GBM is that, due to the assumption of constant drift and volatility, stylized facts of financial time-series, such as volatility clustering and heavy-tailedness in the returns distribution, cannot be captured. We propose a model where volatility and drift are able to switch between regimes; more specifically, they are governed by an unobservable Markov chain. Hence, we model exchange rates with a hidden Markov model (HMM) and generate scenarios for counterparty exposure using this approach. A numerical study is carried out and backtesting results for a number of exchange rates are presented. The impact of using a regime-switching model on counterparty exposure is found to be profound for derivatives with non-linear payoffs.

scholarly journals Shift Detection in Hydrological Regimes and Pluriannual Low-Frequency Streamflow Forecasting Using the Hidden Markov Model

Water ◽  
2020 ◽  
Vol 12 (7) ◽  
pp. 2058 ◽  
Author(s):  
Larissa Rolim ◽  
Francisco de Souza Filho
Keyword(s):  
Time Series ◽  
Markov Model ◽  
Hidden Markov Model ◽  
Extreme Events ◽  
Hidden Markov ◽  
Low Frequency ◽  
Streamflow Forecasting ◽  
Hydrologic Time Series ◽  
Low Frequency Variability ◽  
The Impact

Improved water resource management relies on accurate analyses of the past dynamics of hydrological variables. The presence of low-frequency structures in hydrologic time series is an important feature. It can modify the probability of extreme events occurring in different time scales, which makes the risk associated with extreme events dynamic, changing from one decade to another. This article proposes a methodology capable of dynamically detecting and predicting low-frequency streamflow (16–32 years), which presented significance in the wavelet power spectrum. The Standardized Runoff Index (SRI), the Pruned Exact Linear Time (PELT) algorithm, the breaks for additive seasonal and trend (BFAST) method, and the hidden Markov model (HMM) were used to identify the shifts in low frequency. The HMM was also used to forecast the low frequency. As part of the results, the regime shifts detected by the BFAST approach are not entirely consistent with results from the other methods. A common shift occurs in the mid-1980s and can be attributed to the construction of the reservoir. Climate variability modulates the streamflow low-frequency variability, and anthropogenic activities and climate change can modify this modulation. The identification of shifts reveals the impact of low frequency in the streamflow time series, showing that the low-frequency variability conditions the flows of a given year.

EM algorithm for Markov chains observed via Gaussian noise and point process information: Theory and case studies

2018 ◽  
Vol 35 (1-2) ◽  
pp. 51-72 ◽  
Author(s):  
Camilla Damian ◽  
Zehra Eksi ◽  
Rüdiger Frey
Keyword(s):  
Markov Model ◽  
Em Algorithm ◽  
Credit Risk ◽  
Hidden Markov Model ◽  
Point Process ◽  
Gaussian Noise ◽  
Goodness Of Fit ◽  
Markov Models ◽  
Hidden Markov ◽  
Process Observation

AbstractIn this paper we study parameter estimation via the Expectation Maximization (EM) algorithm for a continuous-time hidden Markov model with diffusion and point process observation. Inference problems of this type arise for instance in credit risk modelling. A key step in the application of the EM algorithm is the derivation of finite-dimensional filters for the quantities that are needed in the E-Step of the algorithm. In this context we obtain exact, unnormalized and robust filters, and we discuss their numerical implementation. Moreover, we propose several goodness-of-fit tests for hidden Markov models with Gaussian noise and point process observation. We run an extensive simulation study to test speed and accuracy of our methodology. The paper closes with an application to credit risk: we estimate the parameters of a hidden Markov model for credit quality where the observations consist of rating transitions and credit spreads for US corporations.

Auscultating Diagnosis for Hemodialysis Shunt Stenosis using a Self-Organizing Map and Hidden Markov Model

2012 ◽  
Vol 132 (10) ◽  
pp. 1589-1594 ◽  
Author(s):  
Hayato Waki ◽  
Yutaka Suzuki ◽  
Osamu Sakata ◽  
Mizuya Fukasawa ◽  
Hatsuhiro Kato
Keyword(s):  
Markov Model ◽  
Hidden Markov Model ◽  
Hidden Markov ◽  
Self Organizing Map ◽  
Self Organizing
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