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Evolutionary Approaches for Estimating a Coupled Markov Chain Model for Credit Portfolio Risk Management

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Applications of Evolutionary Computing (EvoWorkshops 2009)

Part of the book series: Lecture Notes in Computer Science ((LNTCS,volume 5484))

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Abstract

The analysis and valuation of structured credit products gained significant importance during the sub-prime mortgage crisis in 2007. Financial companies still hold many products for which the risk exposure is unknown. The Coupled Markov Chain approach can be used to model rating transitions and thereby default probabilities of companies. The likelihood of the model turns out to be a non-convex function of the parameters to be estimated. Therefore heuristics are applied to find the ML estimators. In this paper, we outline the model and its likelihood function, and present a Particle Swarm Optimization algorithm, as well as an Evolutionary Optimization algorithm to maximize this likelihood function. Numerical results conclude the paper.

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References

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Author information

Authors and Affiliations

  1. Department of Statistics and Decision Support Systems, University of Vienna, Austria

    Ronald Hochreiter & David Wozabal

Authors
  1. Ronald Hochreiter
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  2. David Wozabal
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Editor information

Editors and Affiliations

  1. Department of Animal Production Epidemiology and Ecology, University of Torino, Via Leonardo da Vinci 44, 10095, Grugliasco, Italy

    Mario Giacobini

  2. Quinn School of Business, Belfield, University College Dublin, Dublin 4, Ireland

    Anthony Brabazon

  3. Department of Computer Engineering, University of Parma, Viale Usberti 181/a, 43100, Parma, Italy

    Stefano Cagnoni

  4. Dalla Molle Institute for Artificial Intelligence (IDSIA), Gallelria 2, 6928, Manno-Lugano, Switzerland

    Gianni A. Di Caro

  5. School of Engineering and Applied Science,Aston Triangle, Aston University, B4 7ET, Birmingham, UK

    Anikó Ekárt

  6. Complex Adaptive Systems Group, Instituto Tecnológico de Informática, Ciudad PolitŽcnica de la Innovacin, Edif. 8G Acceso B, 46022, Valencia, Spain

    Anna Isabel Esparcia-Alcázar

  7. Next Generation Itelligent Networks Research Center (nexGIN RC), National University of Computer and Emerging Sciences (NUCES), Islamabad, Pakistan

    Muddassar Farooq

  8. Faculty of Economics and Social Sciences, Helmut-Schmidt-University, Holstenhofweg 85, 22043, Hamburg, Germany

    Andreas Fink

  9. Department of Informatics Engineering, Polo II - Pinhal de Marrocos, University of Coimbra, 3030 - 290, Coimbra, Portugal

    Penousal Machado

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© 2009 Springer-Verlag Berlin Heidelberg

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Hochreiter, R., Wozabal, D. (2009). Evolutionary Approaches for Estimating a Coupled Markov Chain Model for Credit Portfolio Risk Management. In: Giacobini, M., et al. Applications of Evolutionary Computing. EvoWorkshops 2009. Lecture Notes in Computer Science, vol 5484. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-01129-0_23

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  • DOI: https://doi.org/10.1007/978-3-642-01129-0_23

  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-642-01128-3

  • Online ISBN: 978-3-642-01129-0

  • eBook Packages: Computer ScienceComputer Science (R0)

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