We give an empirical assessment of I^2, a structural credit model based on incomplete information. In this model, investors cannot observe a firm's default barrier. As a consequence, I^2 exhibits both the economic appeal of a structural model and the tractable pricing formulae and empirical...

Wrong way risk can be incorporated in Credit Value Adjustment (CVA) calculations in a reduced form model. Hull and White (2012) introduced a CVA model that captures wrong way risk by expressing the stochastic intensity of a counterparty's default time in terms of the financial institution's...

Factor analysis of security returns aims to decompose a return covariance matrix into systematic and specific risk components. To date, most commercially successful factor analysis has been based on fundamental models, although there is a large academic literature on statistical models. While...

In this article, the authors measure the impact of estimation error on latent factor model forecasts of portfolio risk and factor exposures. In markets simulated with a Gaussian return generating process, the authors measure errors in forecasts for equally weighted and long-only minimum variance...

We investigate how the choice of accounting metric and implementation affect the performance of a value strategy. We find that: • Strategies based on book-to-price (B/P) and earnings-to-price (E/P) ratios delivered a positive premium over the 60-year horizon from 1951 to 2013.• E/P had...

We evaluate several long/short strategies for managing a portfolio of default swaps. The strategies are based on a ranking of credits by residuals, which are the differences between market spreads and spreads generated by the iSpread structural model. Investment grade portfolios for the U.S. and...

Portfolio risk forecasts are commonly evaluated using test statistics that are sums of random variables. We study the distributional properties of these test statistics for value at risk, expected shortfall, and volatility. For a diverse collection of 74 US equity portfolios, risk forecasts...

We develop a portfolio risk model that uses high-frequency data to forecast the loss surface, which is the set of loss distributions at future time horizons. Our model uses a fully automated, semi-parametric fitting procedure that has its basis in extreme value statistics. We take account of...

From the inception of the recent financial crisis in July 2007 to the turnaround in March 2009, the MSCI UK Value Investable Market Index (MSCI UK Value IMI) lost roughly 65% of its value, and then recovered half its losses during the remainder of 2009. In this Research Insight, we use the Barra...