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Correlations are crucial for pricing and hedging derivatives whose payoff depends on more than one asset. Typically, correlations computed separately for ordinary and stressful market conditions differ considerably, a pattern widely termed "correlation breakdown." As a result, risk managers...
Persistent link: https://www.econbiz.de/10005368286
Risk management information systems are designed to overcome the problem of aggregating data across diverse trading units. The design of an information system depends on the risk measurement methodology that a firm chooses. Inherent in the design of both a risk management information system and...
Persistent link: https://www.econbiz.de/10005368299
Financial dealer firms have invested heavily in recent years to develop information systems for risk measurement. I take it as given that technological progress is likely to continue at a rapid pace, making it less expensive for financial firms to assemble risk information. I look beyond...
Persistent link: https://www.econbiz.de/10005368529
Synthetic collateralized debt obligations, or synthetic CDOs, are popular vehicles for trading the credit risk of a portfolio of assets. Following a brief summary of the development of the synthetic CDO market, I draw on recent innovations in modeling to present a pricing model for CDO tranches...
Persistent link: https://www.econbiz.de/10005393772
Jamshidian and Zhu (1997) propose a discrete grid method for simplifying the computation of Value at Risk (VaR) for fixed-income portfolios. Their method relies on two simplifications. First, the value of fixed income instruments is modeled as depending on a small number of risk factors chosen...
Persistent link: https://www.econbiz.de/10005394071
Event risk is the risk that a portfolio's value can be affected by large jumps in market prices. Event risk is synonymous with "fat tails" or "jump risk". Event risk is one component of "specific risk", defined by bank supervisors as the component of market risk not driven by market-wide shocks....
Persistent link: https://www.econbiz.de/10005514188
Persistent link: https://www.econbiz.de/10001573187
The striking growth of credit derivatives suggests that market participants find them to be useful tools for risk management. This paper illustrates credit derivatives' value with three examples: a commercial bank using credit derivatives to manage loan portfolio risk; an investment bank using...
Persistent link: https://www.econbiz.de/10005361115
Persistent link: https://www.econbiz.de/10005361181
We examine differences in default rates by sector and obligor domicile. We find evidence that credit ratings have been imperfectly calibrated across issuer sectors in the past. Controlling for year of issue and rating, default rates appear to be higher for U.S. financial firms than for U.S....
Persistent link: https://www.econbiz.de/10005368242