Journal of Credit Risk
ISSN:
1744-6619 (print)
1755-9723 (online)
Editor-in-chief: Linda Allen and Jens Hilscher
![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Expected loss and fair value over the credit cycle
Daniel Philps, Solomon Peters
Abstract
ABSTRACT
We present an easily applied method of risk-adjusting reduced-form models for changes in systematic risk over the credit cycle. Using an empirical approach, we model the probable changes in systematic risk over time, showing that investment-grade portfolios that are naive to changes in levels of systematic risk can significantly underestimate expected losses. We build a valuation model that risk-adjusts credit spreads for probable future levels of systematic risk. The model is used to construct lowturnover portfolios, and it is shown to outperform both a naive approach and also the Global Lehman Credit Index for the period 1981–2003.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net