In order to analyze the pricing of portfolio credit risk – as revealed by tranche spreads of a popular credit default swap (CDS) index – we extract risk-neutral probabilities of default (PDs) and physical asset return correlations from single-name CDS spreads. The time profile and overall...

This paper develops an empirical procedure for analyzing the impact of model misspecification and calibration errors on measures of portfolio credit risk. When applied to large simulated portfolios with realistic characteristics, this procedure reveals that violations of key assumptions of the...

Equity and credit-default-swap (CDS) markets are in disagreement as to the extent to which asset returns co-move across firms. This suggests market segmentation and casts ambiguity about the asset-return correlations underpinning observed prices of portfolio credit risk. The ambiguity could be...

This article compares the linkages between credit fundamentals, ratings and value-at-risk measures for CDO tranches with those for corporate bond exposures. A sensitivity analysis incorporating market information and rating migrations data reveals that the behaviour of CDO tranche ratings can...

This paper evaluates the capacity of five structural credit risk models to forecast default rates. In contrast to previous studies with similar objectives, the paper employs firm-level data and finds that model-based forecasts of default rates tend to be unbiased and to deliver point-in-time...

In the late 1990s, Morris and Shin proposed a new theoretical framework of financial crises, which generalised traditional models of strategic complementarity and self-fulfilling beliefs by incorporating idiosyncratic uncertainty about the state. The innovative feature of their framework is...

The empirical methodology of the paper establishes if a speculative attack, which is accounted for via sunspots in the presence of multiple equilibria, could have been in fact driven uniquely by economic fundamentals. The methodology is based on the theoretical models of Bertola and Svensson...

This paper evaluates empirically the performance of six structural credit risk models by comparing the probabilities of default (PDs) they deliver to ex post default rates. In contrast to previous studies pursuing similar objectives, the paper employs firm-level data and finds that theory-based...

This paper models currency attacks as carried out by speculators who condition their actions on private signals about the state and on the market-clearing interest rate. Besides affecting speculators' payoffs, this interest rate also provides an endogenous public signal. For a plausible type of...

Increasing demand for collateral assets in the aftermath of the financial crisis has raised concerns about a shortage of high-quality assets (HQA). Drawing on a recent report by the Committee on the Global Financial System, we argue that such concerns seem unjustified. In aggregate, the increase...