On The Effectiveness of The Credit Portfolio Model by Liao and Chen (2006)

• Main Authors: Shu-Yu Lin, 林書妤
• Other Authors: 廖咸興
• Format: Others
• Language: en_US
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/73932272319625049806

碩士 === 國立臺灣大學 === 財務金融學研究所 === 97 === We employ CDX market data to empirically examine the effectiveness of the credit portfolio model developed by Liao and Chen (2006), which combines a cash flow based model with a conditional independent default approach. Our empirical results show the credit portfolio model underestimate 5 year credit spread of a Dow Jones CDX credit portfolio. There are several ways to modify the model, including alternative default threshold settings, employing market implied cash flow volatility, or superimposing jumps on the cash flow processes. Moreover, incorporating forward looking macroeconomic factors enables the model to catch rare events induced jumps in the credit spread.