Extending Credit Risk (Pricing) Models for the Simulation of Portfolios of Interest Rate and Credit Risk Sensitive Securities
AbstractWe discuss extensions of intensity based models for pricing credit risk and derivative securities to the simulation and valuation of portfolios. The stochasticity in interest rates, credit spreads (default intensities) and rating migrations are incorporated in a unified framework. Scenarios of future prices of all securities are calculated in a risk-neutral world. The calculated prices are consistent with observed prices and the term structure of default free and defaultable interest rates. Three applications are discussed: (i) study of the inter-temporal price sensitivity of credit bonds to changes in interest rates, default probabilities, recovery rates and rating migration, (ii) portfolio simulations with attribution of changes to credit events and interest rates and, (iii) tracking of corporate bond indices. Key words: credit risk, default risk, simulation, integrated product management
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Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 01-25.
Date of creation: Jul 2001
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Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ACC-2001-08-30 (Accounting & Auditing)
- NEP-ALL-2001-08-30 (All new papers)
- NEP-CMP-2001-08-30 (Computational Economics)
- NEP-FIN-2001-08-30 (Finance)
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