7
votes
Martingale measure and replicating portfolio in Risk Neutral Pricing of Defaultable Zero-Coupon Bonds
The risk-neutral probability measure is defined in terms of its numeraire. For the usual risk-neutral probability measure the numeraire is the bank account, $\beta(t)$. If we have a tradeable asset $X(...
- 835
6
votes
Why investment grade floor is set at Baa3/BBB-?
The differences in credit risk between Moody's Baa2 versus Baa3 versus Ba1 versus Ba2 are all comparable. People would pay much less attention to agency ratings had the regulators not forced them to. ...
- 12k
5
votes
Accepted
Annualized actual probability
Yes your formula seems correct under the simplifying assumptions as you can easily verify:
Assume annual default rate is d, and the portfolio size is N. In the first year, we will have Nd defaults. ...
- 6,204
4
votes
Accepted
forward contract on a defaultable zero-coupon bond
Based on notations in this question, assuming the market value recovery mechanism, the pre-default value at time $T_1$ of a zero-coupon bond with maturity $T_2$, where $T_1 < T_2$, is given by
\...
- 21k
3
votes
Accepted
Why investment grade floor is set at Baa3/BBB-?
Cumulative default and transition rates for s&p credit ratings can be found here:
https://www.spglobal.com/ratings/en/research/articles/210407-default-transition-and-recovery-2020-annual-global-...
- 5,662
3
votes
Why investment grade floor is set at Baa3/BBB-?
Yeah, default rate jumps considerably. For example in following, mid value of default rate jumps from 1% to 7.5 % :
"COMMISSION IMPLEMENTING REGULATION (EU) 2016/1799 of 7 October 2016 laying ...
- 31
2
votes
Is it possible to sell protection on own asset with CDS?
First, I would emphasize that default protection is bought and sold on debt securities , not on assets. To answer your question, you cannot sell protection on your own debt. You can sell protection ...
- 16.6k
2
votes
CDS Vs Credit Risk premium over risk free
In theory, it should indeed be equal as holding a bond $B_t$ from some company $X$ as well as paying on a CDS written on the bond should earn you the risk-free rate, given the CDS hedges the default ...
- 7,999
2
votes
Can CreditGrades CDS Pricing Model be used for financial firms?
(Although the question was asked long time ago it may be of help for others as well)
You may want to have a look at Nagel and Purnanandam (2015) Bank Risk Dynamics and Distance to Default
(https://...
- 61
2
votes
Objective measure of highly leveraged firms using Debt-to-EBITDA ratio
It is mainly subjective, depends on country and sector. E.g. when I worked in private equity in a distressed fund a highly levered company was a company with a net-debt to EBITDA ratio > 7.0.
Those ...
- 8,062
2
votes
CreditRisk+ spreadsheet implementation
you can try this on waybackmachine:
https://web.archive.org/web/20000817021426/http://www.csfb.com/creditrisk/
- 21
2
votes
Accepted
Definition of continuously compounded yield for perpetual defaultable coupon bond
You could equate the value function with an infinite series of discounted cash flows, discounted at the yield. Assuming a continuous coupon rate and a continuous yield $r^d$:
$$
r^d:P(V) \stackrel{!}{=...
- 6,445
1
vote
Accepted
Does Gordy Formula measure default risk & downgrade risk?
The model (and models like it) seem to suggest an issuer or entity is, by time $T>0$, in one of two states: defaulted or not. Money is lost only on a default.
- 111
1
vote
Strange calculation for Credit risk
The $TP_{T,2,1} \times \left(TP_{T,1,3} - TP_{T_1,1,3}\right) + TP_{T,2,2} \times \left(TP_{T,2,3} - TP_{T_1,2,3}\right)$ term is clearly supposed to correspond to PD, but its actual meaning is ...
- 203
1
vote
Factors impacting default risk
While not directly carbon footprint but environmental performance:
Bauer & Hann (2010) Corporate environmental management and credit risk
Findings: Environmental concerns are associated with a ...
- 206
1
vote
Where can I find recent tables with the average cumulative default rates?
I also had this problem, because the available annual default studies did not have these information (to the best of my knowledge). Cumulative default rates can be found in the series Semi-Annual ...
- 1,396
1
vote
Calculating the long run average default rate when the portfolio changes during the year
I don't know the answer to this and am responding purely out of interest and idea sharing, since I like the question.
Could this work as a Parametric intensive computational statistical approach;
1) ...
- 9,215
1
vote
Accepted
From quoted spread and coupon to upfront, and vice versa : which recovery rates and when?
I was indeed wrong : only the assumed recovery rate is used. This is for instance confirmed by the QCDS Bloomberg screen that shows only one recovery rate to do the (quoted spread,coupon) --> upfront ...
- 1,223
1
vote
Accepted
Can CreditGrades CDS Pricing Model be used for financial firms?
The capital structure of financial firms, especially one like Bank of Montreal, is indeed quite unlike the simple debts-and-assets model of CreditGrades.
For context, the model is basically one that ...
- 14.7k
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