Related papers: The Underlying Dynamics of Credit Correlations
This paper derives the analytic form of the $h$-step ahead prediction density of a GARCH(1,1) process under Gaussian innovations, with a possibly asymmetric news impact curve. The contributions of the paper consists both in the derivation…
Accurate forecasting of the Volatility-Covariance Matrix (VCV) is central to regulatory capital adequacy processes such as the Internal Capital Adequacy Assessment Process (ICAAP) and the Comprehensive Capital Analysis and Review (CCAR).…
The study of long-horizon returns has received a great deal of attention in recent years (see, for example, Boudoukh, Richardson, and Whitelaw (2008), Neuberger (2012) and Lee (2013), Fama and French (2018)). While most of the discussions…
We investigate a solution for the problems related to the application of multivariate GARCH models to markets with a large number of stocks by restricting the form of the conditional covariance matrix. The model is a factor model and uses…
Accurately estimating risk measures for financial portfolios is critical for both financial institutions and regulators. However, many existing models operate at the aggregate portfolio level and thus fail to capture the complex…
For a given time horizon DT, this article explores the relationship between the realized volatility (the volatility that will occur between t and t+DT), the implied volatility (corresponding to at-the-money option with expiry at t+DT), and…
One of the most important features of financial time series data is volatility. There are often structural changes in volatility over time, and an accurate estimation of the volatility of financial time series requires careful…
We give a detailed account of correlations between credit sector/quality and treasury curve factors, using the robust framework of the Barclays POINT Global Risk Model. Consistent with earlier studies, we find a strong negative correlation…
We propose a Markov chain model for credit rating changes. We do not use any distributional assumptions on the asset values of the rated companies but directly model the rating transitions process. The parameters of the model are estimated…
We introduce a model for the loss distribution of a credit portfolio considering a contagion mechanism for the default of names which is the result of two independent components: an infection attempt generated by defaulting entities and a…
Volatility, as a measure of uncertainty, plays a crucial role in numerous financial activities such as risk management. The Econometrics and Machine Learning communities have developed two distinct approaches for financial volatility…
This paper considers the problem of measuring the credit risk in portfolios of loans, bonds, and other instruments subject to possible default under multi-factor models. Due to the amount of the portfolio, the heterogeneous effect of…
The majority of stylized facts of financial time series and several Value-at-Risk measures are modeled via univariate or multivariate GARCH processes. It is not rare that advanced GARCH models fail to converge for computational reasons, and…
We consider a portfolio allocation problem for trend following (TF) strategies on multiple correlated assets. Under simplifying assumptions of a Gaussian market and linear TF strategies, we derive analytical formulas for the mean and…
In the present work we analyse the dynamics of indirect connections between insurance companies that result from market price channels. In our analysis we assume that the stock quotations of insurance companies reflect market sentiments…
We develop a methodology for index tracking and risk exposure control using financial derivatives. Under a continuous-time diffusion framework for price evolution, we present a pathwise approach to construct dynamic portfolios of…
This research examines the correlations between the return volatility of cryptocurrencies, global stock market indices, and the spillover effects of the COVID-19 pandemic. For this purpose, we employed a two-stage multivariate volatility…
We follow a long path for Credit Derivatives and Collateralized Debt Obligations (CDOs) in particular, from the introduction of the Gaussian copula model and the related implied correlations to the introduction of arbitrage-free dynamic…
In the paper we study dynamics of the arbitrage prices of credit default swaps within a hazard process model of credit risk. We derive these dynamics without postulating that the immersion property is satisfied between some relevant…
Estimating time-varying correlation matrices is challenging because existing methods may adapt slowly to structural changes, impose insufficient regularization, or produce diffuse posterior uncertainty. In moderate dimensions, an additional…