By Donald van Deventer on
6/24/2009 8:26 AM
A number of financial institutions have written to say that they’ve linked macro factors to credit losses, but the next step in the process is unclear. Take the stock index 2 year return, a statistically significant macro factor in the version 3.0 KRIS default models, as an example. If one can predict credit losses as a function of this macro factor, what’s the hedge? Can one just short stock index futures? This post illustrates the answer with a simple example.
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