Analytical methods for hedging systematic credit risk with linear factor portfolios
Abstract
Multi-factor credit portfolio models are used widely today for managing economic capital and pricing collateralized debt obligations (CDOs) and asset-backed securities. Commonly, practitioners allocate capital to the portfolio components (sub-portfolios, counterparties, or transactions). The hedging of credit risk is generally also focused on the 'deltas' of underlying names. We present analytical results for hedging portfolio credit risk with linear combinations of systematic factors, based on the minimization of systematic variance of portfolio losses. We solve these problems within a multi-factor Merton-type credit portfolio model, and apply them to hedge systematic credit default losses of loan portfolios and CDOs.Download Info
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Bibliographic Info
Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 33 (2009)
Issue (Month): 1 (January)
Pages: 37-52
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Handle: RePEc:eee:dyncon:v:33:y:2009:i:1:p:37-52
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Web page: http://www.elsevier.com/locate/jedc
For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).
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Keywords: Credit risk Factor models Hedging Capital allocation;References
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Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Damiano Brigo & Andrea Pallavicini & Roberto Torresetti, 2009. "Credit models and the crisis, or: how I learned to stop worrying and love the CDOs," Quantitative Finance Papers 0912.5427, arXiv.org, revised Feb 2010.
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