We study the pricing of collateralized debt obligations (CDOs) using an extensive new data set for the actively-traded CDX credit index and its tranches. We find that a three-factor portfolio credit model allowing for rm-speci c, industry, and economywide default events explains virtually all of the time-series and crosssectional variation in CDX index tranche prices. These tranches are priced ...

We study an economy populated by three groups of myopic agents: Constrained agents subject to a portfolio constraint that limits their risk-taking, unconstrained agents subject to a standard nonnegative wealth constraint, and arbitrageurs with access to a credit facility. Such credit is valuable as it allows arbitrageurs to exploit the limited arbitrage opportunities that emerge endogenously in...

We propose an approach to optimally select corporate bond portfolios based on bond-specific characteristics (maturity, credit rating, coupon, illiquidity, past performance, and issue size) and macroeconomic conditions (recessions and macroeconomic uncertainty measures). The approach relies on a parametric specification of the portfolio weights and allows us to consider a large cross-section of ...

Quantification and management of credit risk is always crucial for the financial industry. Computing credit risk is generally a challenging task while correlated defaults exist. Traditional approaches such as exponential twisting are model specific and often involve difficult analysis, therefore computational methods are sought to estimate the credit risk when analysis is unavailable. The accur...

Companies in the same industry sector are usually stronger correlated than firms in different sectors, as they are similarly affected by macroeconomic effects, political decisions, and consumer trends. In spite of many stock return models taking account of this fact there are only a few credit default models taking it into consideration. In this paper we present a default model based on nested ...

CreditRisk+ is an influential and widely implemented model of portfolio credit risk. As a close variant of models long used for insurance risk, it retains the analytical tractability for which the insurance models were designed. Value-at-risk can be obtained via a recurrence-rule algorithm, so Monte Carlo simulation can be avoided. Little recognized, however, is that the algorithm is fragile. U...

We study the valuation and hedging of CSA interest rate derivatives. By CSA interest rate derivatives, we mean a portfolio of OTC interest rate derivatives between two defaultable counterparties, connected by the means of a netting agreement regarding the counterparty risk related cash flows between the two parties. CSA cash flows comprise the collateral relative to this netted set of contracts...