Extending Credit Risk (Pricing) Models for the Simulation of Portfolios of Interest Rate and Credit Risk Sensitive Securities

Norbert Jobst and Stavros Zenios

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: We 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

JEL-codes: C15 C63 G11 G12 (search for similar items in EconPapers)
Date: 2001-07
New Economics Papers: this item is included in nep-acc, nep-cmp and nep-fin
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:wop:pennin:01-25

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