Technische Universität München Credit as an Asset Class - risklab

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CHAPTER 1. INTRODUCTION For all selection criteria, we examine optimal asset allocations with different investment universes and different investment horizons. As market implied default correlations between reference entities as per 30 th of September, 2006 (simulation start date) is rather low, we also perform an optimisation for a higher default correlation. The results can be found in the second part of the chapter. Particularly, we work out the main characteristics and the main differences to the results with the market-implied default correlation. fields. Chapter 8 summarises the results of this thesis and gives an outlook on further research 3
Chapter 2 Credit Risk Transfer To obtain a deeper understanding of credit related products, it is necessary to understand credit risk as such, and the drivers and the need for credit risk transfer. This chapter provides an introduction into credit risk transfer. Section 2.1 covers credit risk. After having defined credit risk and its elements, we explain how credit risk is embedded into regulation and its importance for regulation. The traditional credit related instruments, loans and bonds, are described in Section 2.2. They often serve as underlying for credit risk transfer. The two following sections are dedicated to the main possibilities of credit risk transfer. Section 2.3 deals with credit derivatives. It describes their functionality, the risk categories, which can be covered with them, the reasons for their utilisation, and the chances and risks related to these markets. A brief paragraph regarding transaction costs can be found as well as an extensive description of the size and evolution of the market. Section 2.4 covers securitisation. First, a securitisation is described in its basic form. After having given a classification according to possible underlying assets and reasons for the utilisation of securitisations, the risks related to these markets are explained. Then, a brief paragraph regarding transaction costs follows. The section closes with a description of the size and the evolution of the securitisation market. 2.1 Credit Risk 2.1.1 Definition Credit risk can be defined as the ”risk of changes in value associated with unexpected changes in the credit quality” 1 of a counterparty in a financial contract. These unexpected changes range from a reduction in the market value of the financial contract to the default of the counterparty, which is the inability of the obligor to meet payment obligations. Considering credit risk in more detail, one can differentiate between the following individual risk elements: • Default probability – the probability that the counterparty will default on its con- tractual obligations to pay back the debt. 1 See [DS03], p. 3. 4
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CHAPTER 3. CREDIT RISK TRANSFER INS
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Definition 4.1 (Simple Return) CHAP
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Figure 4.2: Histogram of US aggrega
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CHAPTER 4. DATA ANALYSIS Aggregate
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4.4 Summary CHAPTER 4. DATA ANALYSI
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Definition 5.1 (Interest-Rate) CHAP
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CHAPTER 5. SIMULATION AND PRICING F
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with and Proof: A d (t, T ) = D d (
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Theorem 5.12 (Log-Expansion) CHAPTE
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and CHAPTER 5. SIMULATION AND PRICI
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5.5.4 Floating Rate Notes CHAPTER 5
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epeat the adjusted formulas here in
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Chapter 6 Portfolio Selection After
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CHAPTER 6. PORTFOLIO SELECTION µ(x
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above definition of the VaR can als
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L� −∞ FR(r)dr = L� −∞ C
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Chapter 7 Simulation and Simulation
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CHAPTER 7. SIMULATION AND SIMULATIO
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7.1.6 Conditional Value at Risk CHA
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7.1.7 Score CHAPTER 7. SIMULATION A
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7.1.8 Comparison of Optimal Portfol
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7.2.2 Mean-Variance Approach CHAPTE
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7.2.4 Score CHAPTER 7. SIMULATION A
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CHAPTER 8. SUMMARY AND OUTLOOK fact
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Appendix A Mathematical Preliminari
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APPENDIX A. MATHEMATICAL PRELIMINAR
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APPENDIX A. MATHEMATICAL PRELIMINAR
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Appendix B Ratings Rating Descripti
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APPENDIX C. CALCULATION OF THE DYNA
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Appendix E List of Abbreviations AB
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BIBLIOGRAPHY [Das06] Das, S. (2006)
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BIBLIOGRAPHY [NS87] Nelson, C.R., S
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Technische Universität München Credit as an Asset Class - risklab

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