Investors can use either a top-down or bottom-up approach:

1.The top-down investor starts his analysis with global economics, including both international and national economic indicators, such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices. He narrows his search down to regional/industry analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then he narrows his search to the best business in that area.

2.The bottom-up investor starts with specific businesses, regardless of their industry/region.

As a non-mechanical methods of forecasting also Behavioral models can be used. They make predictions integrate insights from psychology with neo-classical economic theory.

(про behavioral models лучше не особо говорить, если увидите что просто fundamental analysis не очень убедил и комиссия спросит какие еще методы вы знаете, тогда можете попробовать всунуть про Beh.finance).

95. Credit Risk Models

Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default.

Types of credit risk:

• Default risk

• Credit spread risk

• Downgrade risk

Credit risk includes Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees. The existence of sovereign risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm's credit quality.

Five macroeconomic variables that affect the probability of sovereign debt rescheduling are: Debt service ratio; Import ratio; Investment ratio; Variance of export revenue; Domestic money supply growth

And Counterparty risk, (otherwise known as default risk), is the risk that an organization does not pay out on a bond, credit derivative, credit insurance contract, or other trade or transaction when it is supposed to. Even organizations who think that they have hedged their bets by buying credit insurance of some sort still face the risk that the insurer will be unable to pay, either due to temporary liquidity issues or longer term systemic issues.

The type of credit risk model used to estimate a rating and a probability of default of a borrower is a central question. If the model used to establish the ratings is wrong then: (1) the pricing of the credit itself will be wrong, (2) the equity requirement won’t be optimal and (3) the risk itself won’t be correctly evaluated. Traditionally, two types of models are opposed: structural models and reduced forms models. The structural models are based on the firm value. The reduced forms models are ’intensity based models’.

The structural credit risk model, or asset value model is a model for assessing credit risk, typically of a corporation's debt (KMV model).

The model considers a corporation financed through a single debt and a single equity issue. The debt comprises a zero-coupon bond that matures at time t = t*, at which time it is to pay investors b dollars. The equity pays no dividends.

Intensity based model

The model is designed for large portfolios of corporate bonds. It does not explain default table term structure of interest rate. It fits term structure of interest rate into market data. The defaults are exogenous.

B(t; T) = _B(t;Nt ; rt ; T); where Nt is the number of defaults in [0; T] in the portfolio. Nt will be modeled by the Non-homogeneous Poisson Process named Cox process.