Articleshttp://hdl.handle.net/10398/79322014-04-20T11:02:25Z2014-04-20T11:02:25ZVulnerable Derivatives and Good Deal BoundsMurgoci, Agathahttp://hdl.handle.net/10398/88992014-03-21T08:37:29Z2014-03-21T00:00:00ZVulnerable Derivatives and Good Deal Bounds
Murgoci, Agatha
We price vulnerable derivatives - i.e. derivatives where the counter-
party may default. These are basically the derivatives traded on the OTC
markets. Default is modeled in a structural framework. The technique
employed for pricing is Good Deal Bounds. The method imposes a new
restriction in the arbitrage free model by setting upper bounds on the
Sharpe ratios of the assets. The potential prices which are eliminated
represent unreasonably good deals. The constraint on the Sharpe ratio
translates into a constraint on the stochastic discount factor. Thus, tight
pricing bounds can be obtained. We provide a link between the objec-
tive probability measure and the range of potential risk neutral measures
which has an intuitive economic meaning. We also provide tight pricing
bounds for European calls and show how to extend the call formula to
pricing other nancial products in a consistent way. Finally, we numeri-
cally analyze the behavior of the good deal pricing bounds.
2014-03-21T00:00:00ZConstant Proportion Debt Obligations (CPDOs)Cont, RamaJessen, Cathrinehttp://hdl.handle.net/10398/88902014-02-27T13:56:58Z2014-02-27T00:00:00ZConstant Proportion Debt Obligations (CPDOs)
Cont, Rama; Jessen, Cathrine
Constant Proportion Debt Obligations (CPDOs) are structured credit
derivatives which generate high coupon payments by dynamically leveraging
a position in an underlying portfolio of investment grade index default
swaps. CPDO coupons and principal notes received high initial credit ratings
from the major rating agencies, based on complex models for the joint
transition of ratings and spreads for all names in the underlying portfolio.
We propose a parsimonious model for analyzing the performance of
CPDO strategies using a top-down approach which captures the essential
risk factors of the CPDO. Our approach allows to compute default
probabilities, loss distributions and other tail risk measures for the CPDO
strategy and analyze the dependence of these risk measures on various
parameters describing the risk factors. We nd that the probability of
the CPDO defaulting on its coupon payments is found to be small{and
thus the credit rating arbitrarily high{ by increasing leverage, but the ratings
obtained strongly depend on assumptions on the credit environment
(high spread or low spread). More importantly, CPDO loss distributions
are found to be bimodal with a wide range of tail risk measures inside a
given rating category, suggesting that credit ratings are insu cient performance
indicators for such complex leveraged strategies. A worst-case
scenario analysis indicates that CPDO strategies have a high exposure to
persistent spread-widening scenarios CPDO ratings are shown to be quite
unstable during the lifetime of the strategy.
2014-02-27T00:00:00ZThe Aggregate Demand for Treasury DebtKrishnamurthy, ArvindVissing-Jørgensen, Annettehttp://hdl.handle.net/10398/88822014-02-21T13:43:22Z2014-02-21T00:00:00ZThe Aggregate Demand for Treasury Debt
Krishnamurthy, Arvind; Vissing-Jørgensen, Annette
Investors value the liquidity and safety of US Treasuries. We document
this by showing that changes in Treasury supply have large effects on
a variety of yield spreads. As a result, Treasury yields are reduced by
73 basis points, on average, from 1926 to 2008. Both the liquidity and
safety attributes of Treasuries are driving this phenomenon. We document
this by analyzing the spread between assets with different liquidity
(but similar safety) and those with different safety (but similar
liquidity). The low yield on Treasuries due to their extreme safety and
liquidity suggests that Treasuries in important respects are similar to
money.
2014-02-21T00:00:00ZCorporate bond liquidity before and after the onset of the subprime crisisDick-Nielsen, JensFeldhütter, PeterLando, Davidhttp://hdl.handle.net/10398/88642014-01-03T09:52:22Z2014-01-03T00:00:00ZCorporate bond liquidity before and after the onset of the subprime crisis
Dick-Nielsen, Jens; Feldhütter, Peter; Lando, David
We analyze liquidity components of corporate bond spreads during 2005–2009 using a
new robust illiquidity measure. The spread contribution from illiquidity increases
dramatically with the onset of the subprime crisis. The increase is slow and persistent
for investment grade bonds while the effect is stronger but more short-lived for
speculative grade bonds. Bonds become less liquid when financial distress hits a lead
underwriter and the liquidity of bonds issued by financial firms dries up under crises.
During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.
2014-01-03T00:00:00Z