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10 votes

Why would Basel III prevent price discovery at credit markets?

The argument about Basel is an adjunct to the central bank argument. There, a relatively price-insenstive CB either distorts credit by buying it directly (ECB, Fed wrt Agencies). Or distorts it ...
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9 votes
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Documentation of the ISDA CDS standard model

I could not find any such detailed documentation after some weeks of looking (not non-stop obviously). It is appallingly documented. I do understand fully what it does though so am happy to field some ...
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  • 306
7 votes
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When do CDS curves yield arbitrage opportunities?

well you can use CDS spreads to strip out implied default probabilities for default before time $T.$ These had better be increasing as a function of $T$ or you have an arbitrage opportunity. However, ...
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  • 6,763
7 votes
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Is repo-ing out a bond the same as shorting the bond?

Repoing out a bond is not shorting the bond. Repoing out is essentially collateralized borrowing. One is selling the bond and agreeing to buy the bond back at an agreed upon price. The difference ...
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  • 5,325
6 votes

On the interface between Quant finance and actuarial-science/insurance-math

Actuarial science traditionally focuses on estimation of joint probabilities using real data where math finance is on valuation of contracts under an arbitrary distribution. It means the first one ...
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  • 10.6k
6 votes

What's the difference between credit risk and counterparty credit risk?

Both 'credit risk' and 'counterparty credit risk' refer to the same type of risk, i.e. the risk that the opposite side of a contract will not honor its obligations to repay. But 'credit risk' will be ...
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  • 251
6 votes
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Relationship between BBB credit spreads and rising interest rates

One explanation might be purely quantitative: The spread is to compensate for the present value (cost) of a possible future default. When interest rates rise all else equal, the discounted cost of ...
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  • 1,277
5 votes
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Markit recovery rates : assumed vs real

This is indeed a markit vocabulary that spread worldwide. Both recoveries are indeed "often" equal, but there is nevertheless a huge difference between them : one is a pure quotation tool whereas the ...
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  • 1,162
5 votes
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"Where is my money": CDS Sensitivities, Spreads and PnL Calculations

You would need to provide more details for an accurate PnL attribution. However, here are some additional points to consider that might help. When you sold protection, you effectively became long ...
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  • 5,325
4 votes
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Hedging bond with CDS of different maturity

It depends on how one is thinking about the hedge. One might be thinking of it as A hedge against catastrophic risk (default of the issuer), or A hedge against changes in (market-implied) default ...
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  • 14.4k
4 votes
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CDS - Accumulated Default Risk?

Most, but far from all, companies maintain a relatively steady debt load. When a bond matures, they fund its principal payout with a new bond. Sometimes companies do take on more and more debt, ...
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  • 14.4k
4 votes

Validating a Credit Scoring Model without Data

If you don't have a significant amount of losses in your portfolio to validate the model, you should be able to obtain external loss data and adjust it where necessary to better fit your organization. ...
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4 votes
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Is a CDS spread a spread in a typical sense

Regarding the terminology, there is no relation between CDS spread and bid/ask spread. The term spread in this sense refers to the related difference (spread) of the effective (credit risky) interest ...
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  • 106
4 votes

Intuitively, why does liquidity premium contribute to bond yield?

For clarity, I'll use two expressions, "liquidity premium" and "illiquidity premium": "Liquidity premium" arises when investors value the liquidity profile of an instrument so much that they are ...
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  • 10.9k
4 votes

Why would Basel III prevent price discovery at credit markets?

Assume, for a moment, that all of the math behind modern portfolio theory is incorrect. See, for example, this video on deriving the distribution of returns. Without the normality assumption, ...
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  • 4,105
4 votes

Can I calculate the CVA or DVA over a sovereign portfolio?

CVA stands for Credit Valuation Adjustment and should be applied to derivatives and not bond portfolios. The reason is that unlike derivatives, a bond has the counterparty credit quality implicitly ...
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  • 5,335
4 votes

Comparing asset swap spreads

Let me add that in my experience, floating-rate bonds are less liquid than fixed coupon bonds, particularly in emerging markets and also particularly for corporates. As user42108 pointed out, it might ...
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  • 5,191
3 votes

Validating a Credit Scoring Model without Data

I do not know the regulatory rules for this case, but methodologically you could take another similar dataset "peer data" and then check how correctly your model predicts the losses of this dataset.
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  • 5,649
3 votes
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CVA/CDVA - Worsened Credit Quality implies profit?

As I see it, the term $\Pi_B(t, T)$ is the value of the derivatives already owned by the bank. So, it's not some price they need to pay but an asset on the balance sheet. This increase in asset value ...
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  • 7,662
3 votes

On the interface between Quant finance and actuarial-science/insurance-math

The classical connection is the http://en.m.wikipedia.org/wiki/Esscher_transform developed for actuaries in 1932 which essentially transforms the objective probability measure into the risk neutral ...
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  • 4,227
3 votes

What is a standard credit default swap contract and where can I find spread data? What alternatives exist to judge creditworthiness?

Here is another Credit Default Swap database which is rather extensive, daily spreads of roughly 700 entities starting in 2006.
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  • 281
3 votes

What is an appropriate hedge ratio for hedging a credit instrument with equity of the same issuer?

One way to approach this is to use a structural credit model which links the price of debt and equity. To start with, you may wish to consider the JP Morgan / Deutsche Bank Credit Grades model which ...
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  • 2,069
3 votes
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Introducing credit risk to an already implemented interest rate model

Here are some practical tips for selecting stochastic processes for spread curves, for example, in Monte Carlo simulation. Typically you formulate a joint stochastic model for yields at key ...
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  • 3,365
3 votes

How is the default probability implied from market implied CDS spreads for CVA/DVA calculation?

A methodology for estimating rating/ region/ sector proxies for ACVA calculations can be found here: http://www.nomura.com/resources/europe/pdfs/cva-cross-section.pdf Please let me know if you need ...
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  • 4,227
3 votes

How is the default probability implied from market implied CDS spreads for CVA/DVA calculation?

Your reference says "This method derives implied CDS spreads for unobservable issuers through the interpolation or extrapolation of observable CDS. It is a factor model that constructs CDS spread ...
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  • 306
3 votes

What's the difference between credit risk and counterparty credit risk?

I think the accepted answer gives the right insight, but I would like to add a further consideration: the difference between credit and counterparty risk is related to the main risk you are seeking ...
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3 votes

Literature on credit risk premia

Two papers by AQR might be of use: Asvanunt, A. and S. Richardson (2016), “The Credit Risk Premium”: Despite theoretical and intuitive reasons for a credit risk premium, past research has found ...
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  • 1,708
3 votes
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Why do we swap the bond value and par value at the beginning in the Asset Swap

Rather than thinking of an asset swap as a traded instrument, it can be useful to think of the asset swap spread as a relative value indicator. The asset swap PV has two parts, the bond part (valued ...
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  • 5,638
3 votes

CDS Indices Query

Every 6 months, there is a new series of an index (usually with slightly different names). The "on the run" series (maturing on IMM date 5 years from now) is the most liquid. "Off the run" series (...
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