Quantitative Credit Portfolio Management : Practical Innovations for Measuring and Controlling Liquidity, Spread, and Issuer Concentration Risk

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2011-12-06
  • Publisher: Wiley

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An innovative approach to post-crash credit portfolio management Credit portfolio managers traditionally rely on fundamental research for decisions on issuer selection and sector rotation. Quantitative researchers tend to use more mathematical techniques for pricing models and to quantify credit risk and relative value. The information found here bridges these two approaches. In an intuitive and readable style, this book illustrates how quantitative techniques can help address specific questions facing today's credit managers and risk analysts. A targeted volume in the area of credit, this reliable resource contains some of the most recent and original research in this field, which addresses among other things important questions raised by the credit crisis of 2008-2009. Divided into two comprehensive parts, Quantitative Credit Portfolio Management offers essential insights into understanding the risks of corporate bonds-spread, liquidity, and Treasury yield curve risk-as well as managing corporate bond portfolios. Presents comprehensive coverage of everything from duration time spread and liquidity cost scores to capturing the credit spread premium Written by the number one ranked quantitative research group for four consecutive years by Institutional Investor Provides practical answers to difficult question, including: What diversification guidelines should you adopt to protect portfolios from issuer-specific risk? Are you well-advised to sell securities downgraded below investment grade? Credit portfolio management continues to evolve, but with this book as your guide, you can gain a solid understanding of how to manage complex portfolios under dynamic events.

Author Biography

ARIK BEN-DOR, PhD, is a Director and Senior Analyst in the Quantitative Portfolio Strategy (QPS) Group at Barclays Capital Research. He joined the group in 2004 after completing a PhD in finance from the Kellogg School of Management. Ben-Dor has published extensively in the Journal of Portfolio Management, Journal of Fixed Income, and Journal of Alternative Investments on innovative approaches to managing risk in credit portfolios and on performance analysis and optimization of hedge fund portfolios.

LEV DYNKIN, PhD, is the founder and Global Head of the Quantitative Portfolio Strategy Group at Barclays Capital Research. Dynkin and the QPS group joined Barclays Capital in 2008 from Lehman Brothers where the group was a part of fixed income research since 1987—one of the longest tenures for an investor-focused research group on Wall Street. QPS was rated first in Quantitative Portfolio Research by Institutional Investor magazine for all three years that this category was included in their fixed income survey. Dynkin is a member of the editorial advisory board of the Journal of Portfolio Management. He coauthored, with other members of QPS (including Hyman and Phelps), Quantitative Management of Bond Portfolios.

JAY HYMAN, PhD, is a Managing Director in the Quantitative Portfolio Strategy Group at Barclays Capital Research. He joined the group in 1991 and has since worked on issues of risk budgeting, cost of investment constraints, improved measures of risk sensitivities, and optimal risk diversification for portfolios spanning all fixed income asset classes. Hyman helped develop a number of innovative measures that have been broadly adopted by portfolio managers and that have changed standard industry practice.

BRUCE D. PHELPS, PhD, is a Managing Director in the Quantitative Portfolio Strategy Group at Barclays Capital Research, which he joined in 2000. Prior to that, he was an institutional portfolio manager and head of fixed income at Ark Asset Management. Phelps was also senior economist at the Chicago Board of Trade, where he designed derivative contracts and electronic trading systems, and an international credit officer and foreign exchange trader at Wells Fargo Bank. Phelps is a member of the editorial board of the Financial Analysts Journal.

Table of Contents

Forewordp. xvii
Introductionp. xix
Notes on Terminologyp. xxvii
Measuring the Market Risks of Corporate Bonds
Measuring Spread Sensitivity of Corporate Bondsp. 3
Analysis of Corporate Bond Spread Behaviorp. 5
A New Measure of Excess Return Volatilityp. 20
Refinements and Further Testsp. 25
Summary and Implications for Portfolio Managersp. 30
Appendix: Data Descriptionp. 34
DTS for Credit Default Swapsp. 33
Estimation Methodologyp. 40
Empirical Analysis of CDS Spreadsp. 41
Appendix: Quasi-Maximum Likelihood Approachp. 51
DTS for Sovereign Bondsp. 55
Spread Dynamics of Emerging Markets Debtp. 55
DTS for Developed Markets Sovereigns: The Case of Euro Treasuriesp. 59
Managing Sovereign Risk Using DTSp. 66
A Theoretical Basis for D7Sp. 73
The Merton Model: A Zero-Coupon Bondp. 74
Dependence of Slope on Maturityp. 77
Quantifying the Liquidity of Corporate Bondsp. 81
Liquidity Cost Scores (LCS) for U.S. Credit Bondsp. 82
Liquidity Cost Scores: Methodologyp. 88
LCS for Trader-Quoted Bondsp. 92
LCS for Non-Quoted Bonds: The LCS Modelp. 96
Testing the LCS Model: Out-of-Sample Testsp. 102
LCS for Pan-European Credit Bondsp. 113
Using LCS in Portfolio Constructionp. 123
Trade Efficiency Scores (TES)p. 129
Joint Dynamics of Default and Liquidity Riskp. 133
Spread Decomposition Methodologyp. 138
What Drives OAS Differences across Bonds?p. 139
How Has the Composition of OAS Changed?p. 141
Spread Decomposition Using an Alternative Measure of Expected Default Lossesp. 145
High-Yield Spread Decompositionp. 147
Applications of Spread Decompositionp. 147
Alternative Spread Decomposition Modelsp. 150
Appendixp. 152
Empirical versus Nominal Durations of Corporate Bondsp. 157
Empirical Duration: Theory and Evidencep. 159
Segmentation in Credit Marketsp. 73
Potential Stale Pricing and Its Effect on Hedge Ratiosp. 173
Hedge Ratios Following Rating Changes: An Event Study Approachp. 179
Using Empirical Duration in Portfolio Management Applicationsp. 186
Managing Corporate Bond Portfolios
Hedging the Market Risk in Pairs Tradesp. 197
Data and Hedging Simulation Methodologyp. 199
Analysis of Hedging Resultsp. 200
Appendix: Hedging Pair-Wise Trades with Skillp. 208
Positioning along the Credit Curvep. 213
Data and Methodologyp. 214
Empirical Analysisp. 217
The 2007-2009 Credit Crisisp. 229
Spread Behavior during the Credit Crisisp. 229
Applications of DTSp. 234
Advantages of DTS in Risk Model Constructionp. 244
A Framework for Diversification of Issuer Riskp. 249
Downgrade Risk before and after the Credit Crisisp. 250
Using DTS to Set Position-Size Ratiosp. 257
Comparing and Combining the Two Approaches to Issuer Limitsp. 260
How Best to Capture the Spread Premium of Corporate Bonds?p. 265
The Credit Spread Premiump. 266
Measuring the Credit Spread Premium for the IG Corporate Indexp. 266
Alternative Corporate Indexesp. 279
Capturing Spread Premium: Adopting an Alternative Corporate Benchmarkp. 288
Risk and Performance of Fallen Angelsp. 295
Data and Methodologyp. 298
Performance Dynamics around Rating Eventsp. 303
Fallen Angels as an Asset Classp. 319
Obtaining Credit Exposure Using Cash and Synthetic Replicationp. 337
Cash Credit Replication (TCX)p. 338
Synthetic Replication of Cash Indexesp. 351
Credit RBIsp. 358
Referencesp. 367
Indexp. 371
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