Quantitative Credit Portfolio Management: Practica l Innovations for Measuring and Controlling Liquid ity, Spread, and Issuer Concentration Risk

Foreword xvii
<p>Introduction xix</p>
<p>Notes on Terminology xxvii</p>
<p>PART ONE Measuring the Market Risks of Corporate Bonds</p>
<p>CHAPTER 1 Measuring Spread Sensitivity of Corporate Bonds 3</p>
<p>Analysis of Corporate Bond Spread Behavior 5</p>
<p>A New Measure of Excess Return Volatility 20</p>
<p>Refinements and Further Tests 25</p>
<p>Summary and Implications for Portfolio Managers 30</p>
<p>Appendix: Data Description 34</p>
<p>CHAPTER 2 DTS for Credit Default Swaps 39</p>
<p>Estimation Methodology 40</p>
<p>Empirical Analysis of CDS Spreads 41</p>
<p>Appendix: Quasi–Maximum Likelihood Approach 51</p>
<p>CHAPTER 3 DTS for Sovereign Bonds 55</p>
<p>Spread Dynamics of Emerging Markets Debt 55</p>
<p>DTS for Developed Markets Sovereigns: The Case of Euro Treasuries 59</p>
<p>Managing Sovereign Risk Using DTS 66</p>
<p>CHAPTER 4 A Theoretical Basis for DTS 73</p>
<p>The Merton Model: A Zero–Coupon Bond 74</p>
<p>Dependence of Slope on Maturity 77</p>
<p>CHAPTER 5 Quantifying the Liquidity of Corporate Bonds 81</p>
<p>Liquidity Cost Scores (LCS) for U.S. Credit Bonds 82</p>
<p>Liquidity Cost Scores: Methodology 88</p>
<p>LCS for Trader–Quoted Bonds 92</p>
<p>LCS for Non–Quoted Bonds: The LCS Model 96</p>
<p>Testing the LCS Model: Out–of–Sample Tests 102</p>
<p>LCS for Pan–European Credit Bonds 113</p>
<p>Using LCS in Portfolio Construction 123</p>
<p>Trade Efficiency Scores (TES) 129</p>
<p>CHAPTER 6 Joint Dynamics of Default and Liquidity Risk 133</p>
<p>Spread Decomposition Methodology 138</p>
<p>What Drives OAS Differences across Bonds? 139</p>
<p>How Has the Composition of OAS Changed? 141</p>
<p>Spread Decomposition Using an Alternative Measure of Expected Default Losses 145</p>
<p>High–Yield Spread Decomposition 147</p>
<p>Applications of Spread Decomposition 147</p>
<p>Alternative Spread Decomposition Models 150</p>
<p>Appendix 152</p>
<p>CHAPTER 7 Empirical versus Nominal Durations of Corporate Bonds 157</p>
<p>Empirical Duration: Theory and Evidence 159</p>
<p>Segmentation in Credit Markets 173</p>
<p>Potential Stale Pricing and Its Effect on Hedge Ratios 173</p>
<p>Hedge Ratios Following Rating Changes: An Event Study Approach 179</p>
<p>Using Empirical Duration in Portfolio Management Applications 186</p>
<p>PART TWO Managing Corporate Bond Portfolios</p>
<p>CHAPTER 8 Hedging the Market Risk in Pairs Trades 197</p>
<p>Data and Hedging Simulation Methodology 199</p>
<p>Analysis of Hedging Results 200</p>
<p>Appendix: Hedging Pair–Wise Trades with Skill 208</p>
<p>CHAPTER 9 Positioning along the Credit Curve 213</p>
<p>Data and Methodology 214</p>
<p>Empirical Analysis 217</p>
<p>CHAPTER 10 The 2007 2009 Credit Crisis 229</p>
<p>Spread Behavior during the Credit Crisis 229</p>
<p>Applications of DTS 234</p>
<p>Advantages of DTS in Risk Model Construction 244</p>
<p>CHAPTER 11 A Framework for Diversification of Issuer Risk 249</p>
<p>Downgrade Risk before and after the Credit Crisis 250</p>
<p>Using DTS to Set Position–Size Ratios 257</p>
<p>Comparing and Combining the Two Approaches to Issuer Limits 260</p>
<p>CHAPTER 12 How Best to Capture the Spread Premium of Corporate Bonds? 265</p>
<p>The Credit Spread Premium 266</p>
<p>Measuring the Credit Spread Premium for the IG Corporate Index 266</p>
<p>Alternative Corporate Indexes 279</p>
<p>Capturing Spread Premium: Adopting an Alternative Corporate Benchmark 288</p>
<p>CHAPTER 13 Risk and Performance of Fallen Angels 295</p>
<p>Data and Methodology 298</p>
<p>Performance Dynamics around Rating Events 303</p>
<p>Fallen Angels as an Asset Class 319</p>
<p>CHAPTER 14 Obtaining Credit Exposure Using Cash and Synthetic Replication 337</p>
<p>Cash Credit Replication (TCX) 338</p>
<p>Synthetic Replication of Cash Indexes 351</p>
<p>Credit RBIs 358</p>
<p>References 367</p>
<p>Index 371</p>