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Estimating The Systematic Component Of Credit Spreads
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Book Synopsis Estimating the systematic component of credit spreads by : Sebastian Wilde
Download or read book Estimating the systematic component of credit spreads written by Sebastian Wilde and published by GRIN Verlag. This book was released on 2022-08-31 with total page 79 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2022 in the subject Economics - Finance, grade: 1,7, University of Hagen (Fakultät für Wirtschaftswissenschaft, Lehrstuhl für Bank- und Finanzwirtschaft), language: English, abstract: Corporate bond credit spreads are much larger than historical default rates, which leads to an unexplained gap between the default premium component and total credit spread. This gap is referred to as the "credit spread puzzle" in the literature and has driven the discussion of the components of credit spreads in the past decades. The size of each component affects the decision of whether to purchase a particular class of bonds; this underlines its importance in risk management, portfolio management, and valuation. The first goal of the thesis is to provide a comprehensive review of the current state of research on how to decompose credit spreads and estimate their parts. Second, in an empirical study, the systematic risk in current EUR-denominated credit spreads is estimated and compared to the results of Elton et al. (2001). Furthermore, I analyze the regime-dependence of credit spreads for different cross-sections, as systematic risk has proven important in crisis periods. Finally, implications for the calculation of debt beta are derived as in business valuations it is possible to use a debt beta if the debt of the valuation object is subject to a systematic risk that leads to a signifcant risk premium demanded by debt providers. I show that the systematic part of the credit spread for observed EUR-denominated bond spreads from 2009 to 2021 can be assumed higher than in the US bond market, is regime-dependent and would have direct implications on the calculation and relevance of a debt beta for business valuations.
Book Synopsis Estimating the Tax and Credit-Event Risk Components of Credit Spreads by : Luca Benzoni
Download or read book Estimating the Tax and Credit-Event Risk Components of Credit Spreads written by Luca Benzoni and published by . This book was released on 2017 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper argues that tax liabilities explain a large fraction of observed short-maturity investment-grade (IG) spreads, but credit-event premia do not. First, we extend Duffie and Lando (2001) by permitting management to issue both debt and equity. Rather than defaulting, managers of IG firms who receive bad private signals conceal this information and service existing debt via new debt issuance. Consistent with empirical observation, this strategy implies that IG firms have virtually zero credit-event risk (at least until they become "fallen angels"). Second, we provide empirical evidence that short maturity IG spreads are mostly due to taxes. By properly accounting for the tax treatment of capital gains and interest income associated with bond investments, we reconcile this finding with the previous literature which argues against a significant tax component to spreads.
Book Synopsis Macro Factors in the Term Structure of Credit Spreads by : Jeffery D. Amato
Download or read book Macro Factors in the Term Structure of Credit Spreads written by Jeffery D. Amato and published by . This book was released on 2006 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B rated corporate bonds in a doubly-stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables -- indicators of real activity, inflation and financial conditions -- as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs as a forward--looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher-rated bonds.
Book Synopsis Corporate Bond Risk and Real Activity by : Jorge A. Chan-Lau
Download or read book Corporate Bond Risk and Real Activity written by Jorge A. Chan-Lau and published by International Monetary Fund. This book was released on 2001 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis International Convergence of Capital Measurement and Capital Standards by :
Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Credit Spreads, Economic Activity and Fragmentation by :
Download or read book Credit Spreads, Economic Activity and Fragmentation written by and published by . This book was released on 2016 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit spreads may be jointly driven by developments that are orthogonal to the current state of the economy. We show that this unobserved systematic component is demanded to hedge against adverse economic fluctuations. Using either yield-to-maturity spreads or asset swap spreads for 2345 Eurobonds across euro area non-financial industries, we estimate a market-wide relative excess bond premium - a function of the unobserved systematic component -, which can predict real economic activity, the stock market and survey-based economic sentiment. This premium was highly negative between March 2003 and June 2007 in all bond segments and turned positive since then up to the launch of the 3-years long term refinancing operations in December 2011, predicting the financial crisis and the two recessions. Finally, using the countries'excess bond premia, we find that fragmentation risk increased sharply after Lehman's bankruptcy and during the sovereign debt crisis.
Book Synopsis Credit Spreads, Economic Activity and Fragmentation by : Roberto A. De Santis
Download or read book Credit Spreads, Economic Activity and Fragmentation written by Roberto A. De Santis and published by . This book was released on 2016 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit spreads may be jointly driven by developments that are orthogonal to the current state of the economy. We show that this unobserved systematic component is demanded to hedge against adverse economic fluctuations. Using either yield-to-maturity spreads or asset swap spreads for 2345 Eurobonds across euro area non-financial industries, we estimate a market wide relative excess bond premium - a function of the unobserved systematic component, which can predict real economic activity, the stock market and survey-based economic sentiment. This premium was highly negative between March 2003 and June 2007 in all bond segments and turned positive since then up to the launch of the 3-years long term refinancing operations in December 2011, predicting the financial crisis and the two recessions. Finally, using the countries' excess bond premia, we find that fragmentation risk increased sharply after Lehmans bankruptcy and during the sovereign debt crisis.
Book Synopsis The Term Structure of Credit Spreads and the Economic Activity by :
Download or read book The Term Structure of Credit Spreads and the Economic Activity written by and published by . This book was released on with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B-rated corporate bonds in a doubly- stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables - indicators of real activity, inflation and financial conditions - as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs"!as a forward-looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs"!across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher- rated bonds.
Book Synopsis Diversification with Idiosyncratic Credit Spreads by : William T. LIn
Download or read book Diversification with Idiosyncratic Credit Spreads written by William T. LIn and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Following the method of Pesaran, Shin and Smith (1999), this study extends the results of Sun, Lin and Nieh (2007) to investigate the risk diversification issue of individual corporate bonds in portfolios. This is one of the few studies on the decomposition of individual corporate yield spreads. Specifically we adopt the robust econometric method of ARDL-based Pooled Mean Group cointegration analysis on panels of corporate bond data which yields results with rich economic implications for fixed income portfolio management. Empirical decomposition of yield spreads indicates, on the individual corporate bond level, that the idiosyncratic component serves as a good vehicle for risk diversification while considering long run market behavior. In the long run systematic credit spreads are found to be consistent with the agency hypothesis where higher interest rate raises endogenous default risk and it is particularly meaningful for the Taiwanese capital market. Option hypothesis of the structural approach is still valid in the short run in predicting yield spreads to be inversely related to interest rate. Our findings contribute in general to the risk practice of bond portfolio diversification. In particular, the pooled estimation we conducted proves to be superior in working with individual corporate bond data panels and helps related studies in the area.
Book Synopsis Factor Investing and Asset Allocation: A Business Cycle Perspective by : Vasant Naik
Download or read book Factor Investing and Asset Allocation: A Business Cycle Perspective written by Vasant Naik and published by CFA Institute Research Foundation. This book was released on 2016-12-30 with total page 192 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Trading and Securitization of Senior Bank Loans by : Frank J. Fabozzi
Download or read book The Trading and Securitization of Senior Bank Loans written by Frank J. Fabozzi and published by Irwin Professional Publishing. This book was released on 1992 with total page 344 pages. Available in PDF, EPUB and Kindle. Book excerpt: Historically, senior bank loans have been originated by commercial banks and syndicated to other banks and financial institutions. As the senior bank loan market has grown and liquidity in the high-yield bond market has declined, institutional investors have become increasingly active players in the senior bank loan market. There are two key factors that make senior loans especially attractive to the institutional investor: Yield Enhancement; Strong Credit Protection. The Trading and Securitization of Senior Bank Loans was compiled so that today's institutional investor may capitalize on these and other opportunities currently available in the market for senior bank loans and anticipate the future direction of this growing market. To accommodate the breadth of knowledge required in the senior bank loan market, editors John H. Carlson and Frank J. Fabozzi have compiled the work of a wide range of experts, including many practitioners who have been actively involved in the evolution of this market. Topics covered by this distinguished panel include the Bank Loan Syndication Process Brokerage of Loans; Legal Concerns Relating to the Sale of Loans, Credit Analysis of Senior Bank Loans, the Valuation of HLT Bank Loans, the Securitization of Senior Bank Loans, Valuing Distressed Bank Loans, Opportunities in Debtor-in-Possession Lending.
Book Synopsis The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions by : Jiri Podpiera
Download or read book The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions written by Jiri Podpiera and published by International Monetary Fund. This book was released on 2010-06-01 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.
Book Synopsis Modelling Single-name and Multi-name Credit Derivatives by : Dominic O'Kane
Download or read book Modelling Single-name and Multi-name Credit Derivatives written by Dominic O'Kane and published by John Wiley & Sons. This book was released on 2011-03-08 with total page 515 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modelling Single-name and Multi-name Credit Derivatives presents an up-to-date, comprehensive, accessible and practical guide to the pricing and risk-management of credit derivatives. It is both a detailed introduction to credit derivative modelling and a reference for those who are already practitioners. This book is up-to-date as it covers many of the important developments which have occurred in the credit derivatives market in the past 4-5 years. These include the arrival of the CDS portfolio indices and all of the products based on these indices. In terms of models, this book covers the challenge of modelling single-tranche CDOs in the presence of the correlation skew, as well as the pricing and risk of more recent products such as constant maturity CDS, portfolio swaptions, CDO squareds, credit CPPI and credit CPDOs.
Book Synopsis Valuation by : McKinsey & Company Inc.
Download or read book Valuation written by McKinsey & Company Inc. and published by John Wiley & Sons. This book was released on 2015-08-17 with total page 848 pages. Available in PDF, EPUB and Kindle. Book excerpt: McKinsey & Company's #1 best-selling guide to corporate valuation, now in its sixth edition Valuation is the single best guide of its kind, helping financial professionals worldwide excel at measuring, managing, and maximizing shareholder and company value. This new sixth edition provides insights on the strategic advantages of value-based management, complete detailed instruction, and nuances managers should know about valuation and valuation techniques as applied to different industries, emerging markets, and other special situations. Valuation lies at the crossroads of corporate strategy and finance. In today's economy, it has become an essential role — and one that requires excellence at all points. This guide shows you everything you need to know, and gives you the understanding you need to be effective. Estimate the value of business strategies to drive better decision making Understand which business units a corporate parent is best positioned to own Assess major transactions, including acquisitions, divestitures, and restructurings Design a capital structure that supports strategy and minimizes risk As the valuation function becomes ever more central to long- and short-term strategy, analysts and managers need an authoritative reference to turn to for answers to challenging situations. Valuation stands ahead of the field for its reputation, quality, and prestige, putting the solutions you need right at your fingertips.
Book Synopsis Systematic Fixed Income by : Scott A. Richardson
Download or read book Systematic Fixed Income written by Scott A. Richardson and published by John Wiley & Sons. This book was released on 2022-05-17 with total page 310 pages. Available in PDF, EPUB and Kindle. Book excerpt: Understand the role and potential of fixed income as an asset class Systematic Fixed Income: An Investor’s Guide offers readers a powerful, practical, and robust framework for investors and asset managers to preserve the diversifying properties of a fixed income allocation, and add to that unique sources of excess returns via systematic security selection. In other words, this framework allows for efficient capture of fixed income beta and fixed income alpha. Celebrated finance professional Dr. Scott Richardson presents concrete strategies for identifying the relevant sources of risk and return in public fixed income markets and explains the tactical and strategic roles played by fixed income in typical portfolios. In the book, readers will explore: The implementation challenges associated with a systematic fixed income portfolio, including liquidity and risk The systematic return sources for rate and credit sensitive fixed income assets in both developed and emerging markets An essential read for asset managers and institutional investors with a professional interest in fixed income markets, Systematic Fixed Income: An Investor’s Guide deserves a place in the libraries of advanced degree students of finance, business, and investment, as well as other investment professionals seeking to refine their understanding of the full potential of this foundational asset class.
Book Synopsis Financial Markets and the Macroeconomy by : Carl Chiarella
Download or read book Financial Markets and the Macroeconomy written by Carl Chiarella and published by Routledge. This book was released on 2009-06-02 with total page 513 pages. Available in PDF, EPUB and Kindle. Book excerpt: This important new book from a group of Keynesian, but nonetheless technically-oriented economists explores one of the dominant paradigms in financial economics: the ‘intertemporal general equilibrium approach’.
Book Synopsis Financial Institutions Management by : Helen P. Lange
Download or read book Financial Institutions Management written by Helen P. Lange and published by . This book was released on 2015-06-12 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
