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

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...