Questions tagged [credit]
Fixed-income instruments whose price depends in large part upon judgments of the creditworthiness of a corporation or government.
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Concentration risk in credit portfolio
How do you model concentration risk of credit portfolio in IRB/Basel II framework?
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What are the limitations of Gaussian copulas in respect to pricing credit derivatives?
The practice of using Gaussian copulas in modeling credit derivatives has come under a lot of criticism in the past few years. What are the major arguments against using the copula method in this ...
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Validating a Credit Scoring Model without Data
Fellow Quants,
Suppose you have a credit scoring model that is developed without the aid of statistics, because (unfortunately) there is no historical default/loss data in your portfolio. The ...
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How to estimate probability of default from bond prices?
How do you use bond prices/yields to infer probabilities of default? I would think of it as follows:
Create a relationship between default free (e.g., Germany) and defaultable (e.g., Greece) bond ...
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What's the difference between credit risk and counterparty credit risk?
As the title reads, what is the difference between credit risk and counterparty credit risk? What are the key differences?
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On the interface between Quant finance and actuarial-science/insurance-math
Actuaries (at least in Europe) are frequently severily lacking in quant finance topics. At best they are familiar with B&S model.
People going into quant finane or striving to become a quant on ...
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Quanto CDS modeling
What is the market standard for pricing quanto CDS (i.e. CDS which pays the contingent leg in different currency than the pricing leg)?
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What is the unit of the Distance to Default measure?
I read in a book that the distance to default of a company is "2.978".
Can anyone please tell me what is the unit implied behind this measure? Are they "years" for instance?
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How is the default probability implied from market implied CDS spreads for CVA/DVA calculation?
From point 38 on P.17 the default probability can be implied from market implied CDS spreads. "Macro Surface" method is mentioned, but I cannot get any clue of what it is? Where do I get the acedemic ...
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Documentation of the ISDA CDS standard model
I have to validate the use of the ISDA CDS standard model.
Don't understand me wrong - I am sure that the ISDA model is "good" I just need to know what it is in detail.
I can download an Excel-...
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Stochastic recovery rates
How do I model the randomness of recovery rate given default when pricing credit derivatives?
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Multi Factor Credit Risk Models
I am working in the area of building credit risk models. Upto this point, the model I have been focused on using the Asymptotic Single Factor Model, more popularly known as Vasicek Single Factor Model....
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Relationship between BBB credit spreads and rising interest rates
A stylized fact in markets seems to be that there is a negative correlation between interest rates and corporate spreads - as interest rates rise, spreads tend to tighten and vice versa.
I'm ...
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Credit Valuation Adjustments -- computation issues
I'm currently working on my Masters project related to accelerating Greeks computations for CVA on mixed interest rate portfolios. I would like to know about the status of technology for CVA and its ...
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Best simplified way to model volatility in returns of an investment in a risky fixed income asset
I am currently working on a project where I have analyzed a certain category of fixd income instruments, and I now have the gross aggregate yield as well as the theoretical gross-aggregate default-...
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relation between asset's and equity volatilities - merton model
In terms of Merton credit risk model need to find the initial value of counterparty's assets and the volatility of the assets. Both value are not directly observable thus we have to approximate them ...
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What is a standard credit default swap contract and where can I find spread data? What alternatives exist to judge creditworthiness?
I'm doing some work for a company and one of my tasks is to research credit default swaps on banks and to write a page about them explaining what they are and how they're used to evaluate the banks' ...
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"Where is my money": CDS Sensitivities, Spreads and PnL Calculations
Trading CDS I experienced something unexpected:
A half year ago I sold protection on a single name at a spread of 190bp
The coupon was 5% and the contract had a maturity of five years.
Using ...
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How to define and measure liquidity or funding premium in credit markets?
Even companies with just a single non-callable corporate bond outstanding will often have CDS quote spreads that differ from the bond quote spread. During the 2008 crisis, there were dozens of cases ...
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How to interpret this CDS spread sensitivity pattern?
From page 27, Table 6:
Why are sensitivities of CDS slightly negative before the maturity of the CDS?
I do not get the intuition: if I am long a 5-year CDS, the spreads <5y increase, and the 5y ...
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A model to stochastic hazard rate and CDS spread term structure
I'm interested in the term structure of CDS spread.
It's known that the Market CDS rate (fair CDS spread or T-maturity spread) of a CDS contract initiated at $s$, maturity $T$ and recovery function $...
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PDF Calculation by Fourier Inversion of Characteristic Function for Affine Intensity Process in Matlab
I'm trying to use the Fourier inversion formula to plot the PDF of an Affine Stochastic Intensity Reduced Form Credit Model, given its characteristic function.
The characteristic function of an ...
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Why would Basel III prevent price discovery at credit markets?
I'm referring to this interview with Michael Burry.
He says:
Central banks and Basel III have more or less removed price discovery from the credit markets.
Why would Basel III cause this effect?
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When do CDS curves yield arbitrage opportunities?
In CDS markets we can sometimes observe inverted CDS curves or unusually steep curves. I am just wondering at what level certain curves become non-realistic.
E.g. if we have 500bp for the 1-Year ...
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Intuitively, why does liquidity premium contribute to bond yield?
According to the Wikipedia, "The upwards-curving component of the interest yield can be explained by the liquidity premium... Liquidity risk premiums are recommended to be used with longer term ...
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CDS - Accumulated Default Risk?
Say I issue insurance contracts covering fire damage in personal households. Fires occur with a probability of $x$% in a household (and they obviously occur independently from one another). If the ...
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What is an appropriate hedge ratio for hedging a credit instrument with equity of the same issuer?
Given a bond and a stock issued by the same issuer, what is the appropriate ratio of bond-to-stock one should hold in order to minimize the specific risk to that issuer? Equivalently, what is the ...
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Is repo-ing out a bond the same as shorting the bond?
In fixed income, or in any other products for that matter, borrowing an asset is essentially shorting the asset. As a result, you would see hard-to-borrow names where the borrow rates are much higher ...
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Hedging bond with CDS of different maturity
Say I buy a 10-year bond with a notional of 100k. To hedge my credit risk entirely I could buy a 10-year CDS, also on a notional of 100k.
Now, if there are only 5-year CDS trading and no 10-year CDS, ...
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CVA/CDVA - Worsened Credit Quality implies profit?
In the book Counterparty Credit Risk, Collateral and Funding by Brigo et al I found the following:
credit quality of investor WORSENS $\Rightarrow$ books POSITIVE MARK TO MKT
credit quality of ...
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Introducing credit risk to an already implemented interest rate model
Do any standard/generic approaches exist on how to extend an interest rate model to incorporate credit risk?
The first thing that comes to mind would be to just model the credit spread separately - ...
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Correct Discount Curve for Exchange Traded (Centrally Cleared) Products
What's the correct discount curve to use for exchange traded products? Would these be discounted at the OIS rate (because of the central clearing house)?
E.g. the E-Mini S&P500 Future @ CME: I'm ...
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STCDO upper tranche still paying coupons even after all default
We assume :
that a CDO on $n$ names, with a maturity $T$
that at a time $\tau<T$ before the maturity of the CDO, these $n$ names have defaulted,
that we are the protection buyer of the 22-100 ...
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Finding Credit Risk Population Data
Are there any free or relatively cheap sources of aggregate data on credit risk for specific geographic regions, ages, and so on?
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Simplifying an expectation function of default time and rates
I have the following expectation to calculate :
$$ \mathbf{E}\left[ e^{\int_{t_0}^{\tau} r_s ds} \mathbf{1}_{\{\tau < T\}}\right] $$
More precisely, I want to show that :
$$ \mathbf{E}\left[ e^{\...
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What are recent important papers on credit portfolio risk modeling?
I'm interested in papers which consider mathematical models of risks of different portfolios of retail credit. This is not my area of research, so I may be misusing some terms. The idea is simple: I ...
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Replication of "recovery bond"
I just started learning about credit products.
Let $B_t^T$ be the price of a risk free zero coupon bond at time $t$. Similarly, let $C_t^T$ be the price of a zero coupon risky bond from some fixed ...
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Basket Default Swap (BDS)
I would like to understand better the $n^{th}$ to default pair spreads of a basket default swap containing $m>n$ entities.
For example, consider 2 single name CDS's with same spread and same ...
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Comparing asset swap spreads
I am a bit confused when it comes to asset swap spreads of fixed rate bonds vs the same issuers floating rate bonds of the same maturity and issued at the same time. Should these not be comparable (if ...
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Accrual in Default Derivation of Credit CDS Curve
In Trading Credit Curves Part I by JP Morgan we have that each point on a credit (CDS) curve represents:
$$PV(\text{Fee Leg}) = PV(\text{Contingent Leg})$$
which is
$$S_n \sum_{i=1}^{n}\Delta_i ...
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Markit recovery rates : assumed vs real
I often see two different recovery rates in Markit : real recovery rate and assumed recovery rate. What is the difference between them ?
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Are Credit Default Swaps used by B2B Service providers or Vendors?
I understand CDS's are often employed in trading strategies between institutions - That is well publicized. What isn't as publicized is how other customers might look to use a CDS.
I work in an ...
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Systematic credit "liquidity provider" strategy
I was reading a piece published by Bloomberg today, where it says the following:
“A systematic process lends itself to providing liquidity rather than
taking it because our models have views on ...
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Hedging Ratios for Fixed Income Instruments
If you buy a corporate bond and you want to hedge the interest rate risk, how would you know how many interest rate futures/swaps to hedge the bond with?
The same with an MBS security, if you want to ...
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How do you quantify credit risk?
I am trying to figure out how to quantify the change in price on a bond for a change in credit risk. I'm not even sure how to quantify a change in credit risk, but I'm thinking possibly something ...
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Credit Spread Replication by Long/ Short Bonds
I am trying to derive the credit spread using an hypothetical portfolio of a long corporate bond plus a short treasury bond, which have the exact cashflows. I should be able to get the credit spread ...
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Efficient encoding technique for credit ratings
Is there any categorical encoding technique for credit ratings that take into account the kind of non linear nature of the notches of the credit ratings?
The literature standard is the ordinal one ...
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What are the best relative value frameworks for Corporate Credit?
Fixed Income (Credit) fair value models in the literature tend to be variations on cross-sectional regressions. For a recent example in a factor-model setting, see here.
My understanding is that this ...
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The role of micro credit in finance
The concept of micro credit has been around for a while. Recall that Muhammad Yunus together with Grameen Bank were awarded the Nobel price in this context.
I don't have references at hand but I ...
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PCA analysis within Private Credit
A very broad question but nevertheless a important and difficult one.
Within private markets (Private Equity funds, infrastructure funds and private credit funds) how should one do a risk-based PCA ...
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