From Default Probabilities to Credit Spreads PDF Download
Are you looking for read ebook online? Search for your book and save it on your Kindle device, PC, phones or tablets. Download From Default Probabilities to Credit Spreads PDF full book. Access full book title From Default Probabilities to Credit Spreads by Stefan Denzler. Download full books in PDF and EPUB format.
Author: Stefan Denzler Publisher: ISBN: Category : Languages : en Pages : 18
Book Description
Credit risk models like Moody's KMV are now well established in the market and give bond managers reliable estimates of default probabilities for individual firms. Until now it has been hard to relate those probabilities to the actual credit spreads observed on the market for corporate bonds. Inspired by the existence of scaling laws in financial markets by Dacorogna et al. (2001) and Di Matteo et al. (2005) deviating from the Gaussian behavior, we develop a model that quantitatively links those default probabilities to credit spreads (market prices). The main input quantities to this study are merely industry yield data of different times to maturity and expected default frequencies (EDFs) of Moody's KMV.The empirical results of this paper clearly indicate that the model can be used to calculate approximate credit spreads (market prices) from EDFs, independent of the time to maturity and the industry sector under consideration. Moreover, the model is effective in an out-of-sample setting, it produces consistent results on the European bond marketwhere data are scarce and can be adequately used to approximate credit spreads on the corporate level.
Author: Stefan Denzler Publisher: ISBN: Category : Languages : en Pages : 18
Book Description
Credit risk models like Moody's KMV are now well established in the market and give bond managers reliable estimates of default probabilities for individual firms. Until now it has been hard to relate those probabilities to the actual credit spreads observed on the market for corporate bonds. Inspired by the existence of scaling laws in financial markets by Dacorogna et al. (2001) and Di Matteo et al. (2005) deviating from the Gaussian behavior, we develop a model that quantitatively links those default probabilities to credit spreads (market prices). The main input quantities to this study are merely industry yield data of different times to maturity and expected default frequencies (EDFs) of Moody's KMV.The empirical results of this paper clearly indicate that the model can be used to calculate approximate credit spreads (market prices) from EDFs, independent of the time to maturity and the industry sector under consideration. Moreover, the model is effective in an out-of-sample setting, it produces consistent results on the European bond marketwhere data are scarce and can be adequately used to approximate credit spreads on the corporate level.
Author: Heng-Chih Chou Publisher: ISBN: Category : Languages : en Pages : 9
Book Description
This article analyzes the information content of the distance-from-default regarding a firm's default risk. Under the Merton's (1974) option pricing model, both the relation between the expected default probability of a firm and its distance-from-default, and the relation between the credit spreads and distance-from-default are examined. We demonstrate that both expected default probability and credit spreads could be expressed by the analytical function of the distance-from-default. This means that people can easily infer a firm's expected default probability and also its credit spreads from the information of the value of a firm's distance-from-default.
Author: Jing-Zhi Huang Publisher: ISBN: Category : Languages : en Pages : 44
Book Description
A basic requirement for a credit risk model is that it should not imply negative default probabilities. In this paper, we explore the implications of this condition for credit risk modeling. More specifically, we use the condition as a diagnostic tool to investigate if a particular model is consistent with a given set of credit spreads. We show that under this condition, each model has two credit spread boundaries which can be calculated analytically, and the model is correctly specified if and only if the observed credit spread curve lies within the two boundaries. These analytical formulas for the boundaries also allow us to derive some general properties of a large class of credit risk models. Our study also adds to the literature on pricing defaultable claims off the default probability curve, a method widely used in practice. It is well-known that negative default probabilities frequently occur in constructions of default probability curves. Our analysis provides one possible explanation of why this problem happens and also suggests how the problem may be solved (or at least alleviated).
Author: Martijn Cremers Publisher: ISBN: Category : Corporate bonds Languages : en Pages : 58
Book Description
Prices of equity index put options contain information on the price of systematic downward jump risk. We use a structural jump-diffusion firm value model to assess the level of credit spreads that is generated by option-implied jump risk premia. In our compound option pricing model, an equity index option is an option on a portfolio of call options on the underlying firm values. We calibrate the model parameters to historical information on default risk, the equity premium and equity return distribution, and S & P 500 index option prices. Our results show that a model without jumps fails to fit the equity return distribution and option prices, and generates a low out-of-sample prediction for credit spreads. Adding jumps and jump risk premia improves the fit of the model in terms of equity and option characteristics considerably and brings predicted credit spread levels much closer to observed levels.
Author: David Lando Publisher: ISBN: Category : Languages : en Pages :
Book Description
The term structure of interest rates contains information about the market's expectations of the direction of future interest rates. Similarly, the term structure of credit spreads contains information about the market's perception of future credit spreads. The term structure of credit spreads is closely linked with conditional default probabilities and this link suggests a downward sloping term structure of credit spreads for high risk issuers, whose default probability conditional on survival is likely to decrease. This paper shows that for sufficiently low credit quality, as defined by the level of credit spreads, this holds true most of the time when spreads are taken from credit default swap (CDS) markets. We also discuss why CDS markets give a better way of analyzing this problem than bond price data.
Author: Mr.Jorge A. Chan-Lau Publisher: International Monetary Fund ISBN: 1451852916 Category : Business & Economics Languages : en Pages : 21
Book Description
In reduced-form pricing models, it is usual to assume a fixed recovery rate to obtain the probability of default from credit default swap prices. An alternative credit risk measure is proposed here: the maximum recovery rate compatible with observed prices. The analysis of the recent debt crisis in Argentina using this methodology shows that the correlation between the maximum recovery rate and implied default probabilities turns negative in advance of the credit event realization. This empirical finding suggests that the maximum recovery rate can be used for constructing early warning indicators of financial distress.
Author: Martin Knoch Publisher: diplom.de ISBN: 3832418822 Category : Business & Economics Languages : en Pages : 114
Book Description
Inhaltsangabe:Abstract: We discuss the main approaches to quantify the risk of losses arising from a defaulting counterparty to a financial transaction that have been developed over the last 25 years. Every existing method faces major problems in assessing the numerous and partly non-observable factors influencing credit risk. One shortcoming common to all methods is the classical normal assumption for interest rate changes and asset returns. Therefore we suggest the introduction of stable Paretian models to yield more realistic credit spreads. Inhaltsverzeichnis:Table of Contents: 1.Introduction 2.Basic Properties of Credit Risk Models 2.1Financial Position 2.2Default Probability 2.3The Price Of Credit Risk 3.Structural Models 3.1Structural Models With Constant Interest Rates 3.2Structural Models With Stochastic Interest Rates 4.Reduced Form Models 4.1Terminology of Reduced Form Models 4.1.1Credit Risk and Credit Events 4.1.2Rating Categories and Transition Matrices 4.2Reduced Form Modesl With Default Rates 4.3Reduced Form Models With Rating Transitions 4.3.1Modelling Rating Histories With Markov Chains 4.3.2The Introduction of Pseudo-Probabilities 4.3.3Parameter Estimation 5.Models With Implied Credit Spread 6.Hybrid Models 6.1Rating Transitions 6.2Forward Prices 6.3The Distribution of Values 6.3.1Distributions in Credit Risk and Market Risk Measurement 6.4Expected Loss 6.5Unexpected Loss 6.6Example 7.Rating Categories 7.1Alternative Credit Analysis And Rating Methodology 7.2Example. Standard&Poor s Corporate Rating 7.2.1Rating Categories 7.2.2The Rating Process 7.2.3Credit Analysis Factors 7.3Split Ratings 8.Transition Matrices 8.1Default Probabilities 8.1.1Estimating Default Probabilities 8.1.2Errors Arising From Default Estimation 8.1.3Refining Rating Categories 8.2Properties of Transition Matrices in a Markov Model 8.2.1The Markov Property 8.2.2Monotonicity of Rating Transitions 8.2.3Adjusting Transition Matrices for the Markov Property and Monotonicity 8.3Conditional Rating Migrations 9.Recovery Rates 10.The Term Structure of Credit Spreads 10.1Risk Factors With An Impact On Credit Spreads 10.2Volatility of Credit Spreads 10.2.1The Distribution of Yield Spreads 11.Challenges in Assessing Portfolio Credit Risk 11.1Joint Rating Migrations 11.2Expected and Unexpected Losses of a Portfolio 11.3Estimating Correlations 11.4Monte Carlo Simulation 12Assessing Credit Risk With Stable [...]
Author: David Shimko Publisher: Risk ISBN: Category : Business & Economics Languages : en Pages : 670
Book Description
Building upon the seminal work established in the first best selling edition, this fully revised multi-author reference collection brings you up-to date with a complete and cohesive examination on the latest techniques for credit risk assessment and management
Author: Niklas Wagner Publisher: CRC Press ISBN: 1584889950 Category : Business & Economics Languages : en Pages : 600
Book Description
Featuring contributions from leading international academics and practitioners, Credit Risk: Models, Derivatives, and Management illustrates how a risk management system can be implemented through an understanding of portfolio credit risks, a set of suitable models, and the derivation of reliable empirical results. Divided into six sectio
Author: Stefan Denzler
Author: Stefan Denzler
Author: Mark J. Manning
Author: Heng-Chih Chou
Author: Jing-Zhi Huang
Author: Martijn Cremers
Author: David Lando
Author: Mr.Jorge A. Chan-Lau
Author: Martin Knoch
Author: David Shimko
Author: Niklas Wagner