Advertisement

Effects of Integrating Market Risk into Credit Portfolio Models

Abstract

In this chapter, the effect of integrating interest rate and credit spread risk into the CreditMetrics framework14 is analyzed for a portfolio of defaultable zero coupon bonds. In the base case, this portfolio is assumed to be homogeneous. At the risk horizon, the value of a non-defaulted bond is determined by discounting its face value with the risk-free spot yield and the rating-specific credit spread corresponding to the simulated asset return. Risk-free spot yields and rating-specific credit spreads are assumed to be correlated. Furthermore, transition risk is correlated with the interest rate and credit spread risk. If a bond defaults before the risk horizon, its value is set equal to an independent beta-distributed fraction of a risk-free, but otherwise identical, zero coupon bond.

Keywords

Interest Rate Risk Measure Credit Risk Asset Return Credit Spread 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Bibliography

  1. 35.
    See Kiesel, Perraudin and Taylor (2003, p. 23, table 4, matrix ‘Three-year maturity, Jarrow-Lando-Turnbull recovery’, row ‘BBB’).Google Scholar

Copyright information

© Betriebswirtschaftlicher Verlag Dr. Th. Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

Personalised recommendations