In modelling the exposure of collateralized positions, it is well recognized that credit default cannot be treated as a one-time event. Rather, the entire sequence of events leading up to and following the default must be considered, from the last successful margin call in advance of the eventual default to the time when the amount of loss becomes known (in industry parlance, “crystallized”). These events unfold over a period of time called the margin period of risk (MPR).
This Section documents two MPR models.
- The first model, which we called Classical, is presented in Pykhtin, M. (2009), “Modeling Credit Exposure for Collateralized Counterparties”, Journal of Credit Risk, 5 (4) (Winter), pages 3-27. and in Pykhtin, M. (2010), “Collateralized Credit Exposure,” in Counterparty Credit Risk, E. Canabarro, ed., Risk Books.
- The second model is presented in by Andersen, L.B.G., Pykhtin, M., and Sokol, A., “Rethinking Margin Period of Risk”, http://papers.ssrn.com/abstract_id=2719964.