Analyzing the impact of credit migration in a portfolio setting

Tsaig, Y.; Levy, Amnon; Wang, Yashan

doi:10.1016/j.jbankfin.2010.09.027

Cited by 16 publications

(10 citation statements)

References 21 publications

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“…As discussed by Fabozzi (), the likelihood of a rating downgrade for investment grade bonds is significantly greater than the likelihood of upgrade. The pattern is similar for speculative grade bonds: for example, Tsaig et al () report the rating migration rate for bonds initially rated Ba to Baa is 6.25%, while the migration rate for bonds initially rated Ba to B is 8.48% over the 1970–2007 period. Therefore, if investors’ ex ante expectation is that a downgrade is more likely than an upgrade, then an increase in delta (which reduces credit risk) should have a greater incremental effect on yield spread than a proportional increase in vega (which increases credit risk), to the extent that the greater ex ante likelihood of a downgrade has already been priced into the bond.…”

Section: Hypotheses Developmentmentioning

confidence: 84%

The Effects of Relative Changes in CEO Equity Incentives on the Cost of Corporate Debt

Prevost¹,

Devos²,

Rao

2013

Business Fin & Account

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We examine how effort and risk incentives embedded in CEO equity incentives are related to the cost of debt and the role credit worthiness plays in this relationship. Our empirical approach addresses a number of unanswered questions in the literature by examining the sources and effects of co-movements in CEO incentives, whether the proportionality of these movements is rationally priced, and whether the effects are concentrated among bonds with greater likelihood of default. Our findings confirm that effort and risk incentives are rationally priced by bond market participants. We also show that significant cross-sectional effects are more pronounced for speculative bonds, implying that previously documented links between equity incentives and the cost of debt may not be generalizable to all debt issues.

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Section: Hypotheses Developmentmentioning

confidence: 84%

The Effects of Relative Changes in CEO Equity Incentives on the Cost of Corporate Debt

Prevost¹,

Devos²,

Rao

2013

Business Fin & Account

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“…the creditor are willing to accept. Another issue connected with p is that, given a certain rating, the default probability due to the possibility of rating migrations usually increases over time (see for instance Tsaig et al (2011)). This is not incorporated in the multi-period framework suggested above as it would make things more complicated.…”

Section: Hedging Diversification and The Riskyness Of The Cash Flowsmentioning

confidence: 99%

Valuing streams of risky cashflows with risk-value models

Dorfleitner¹,

Gleißner²

2018

JOR

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Based on risk-value models we introduce a multi-period approach to the valuation of streams of risky cash flows. The valuation is based on the (expected) value of the output's or input's magnitude and the risk of the output cash flow, as captured by a risk measure. We derive three formulae for valuing single cash flows and utilize the principles of separate valuation and of cumulating the cash flows to derive a multi-period valuation method. In an axiomatic way, the article sets the foundations for a new approach and suggests several directions for its further development.

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“…. , e N are independent from S. The vector R T i describes the sensitivity 1 In a broader sense, losses may also arise from rating migrations if the rating of the counterparty changes; see, for instance, Tsaig et al (2011). 2 Eckert et al (2016) discuss a credit portfolio framework that allows for dependence between PD, LGD and EAD; see also Kaposty et al (2017) and Farinelli and Shkolnikov (2012).…”

Section: Credit Risk and Credit Portfolio Modelingmentioning

confidence: 99%

A Discussion on Recent Risk Measures with Application to Credit Risk: Calculating Risk Contributions and Identifying Risk Concentrations

Fischer

Moser²,

Pfeuffer

2018

Risks

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In both financial theory and practice, Value-at-risk (VaR) has become the predominant risk measure in the last two decades. Nevertheless, there is a lively and controverse on-going discussion about possible alternatives. Against this background, our first objective is to provide a current overview of related competitors with the focus on credit risk management which includes definition, references, striking properties and classification. The second part is dedicated to the measurement of risk concentrations of credit portfolios. Typically, credit portfolio models are used to calculate the overall risk (measure) of a portfolio. Subsequently, Euler's allocation scheme is applied to break the portfolio risk down to single counterparties (or different subportfolios) in order to identify risk concentrations. We first carry together the Euler formulae for the risk measures under consideration. In two cases (Median Shortfall and Range-VaR), explicit formulae are presented for the first time. Afterwards, we present a comprehensive study for a benchmark portfolio according to Duellmann and Masschelein (2007) and nine different risk measures in conjunction with the Euler allocation. It is empirically shown that-in principle-all risk measures are capable of identifying both sectoral and single-name concentration. However, both complexity of IT implementation and sensitivity of the risk figures w.r.t. changes of portfolio quality vary across the specific risk measures.

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Analyzing the impact of credit migration in a portfolio setting

Cited by 16 publications

References 21 publications

The Effects of Relative Changes in CEO Equity Incentives on the Cost of Corporate Debt

The Effects of Relative Changes in CEO Equity Incentives on the Cost of Corporate Debt

Valuing streams of risky cashflows with risk-value models

A Discussion on Recent Risk Measures with Application to Credit Risk: Calculating Risk Contributions and Identifying Risk Concentrations

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