Chartis Research Report Ranks Kamakura Risk Manager (Fiserv KRM) Number 1 in the World July 23, 2010 Friday Forecast: 10 Year Forecast of U.S. Treasury Yields And U.S. Dollar Interest Rate Swap Spreads Kamakura Blog: Fixed Income Performance Attribution July 16, 2010 Friday Forecast: 10 Year Forecast of U.S. Treasury Yields And U.S. Dollar Interest Rate Swap Spreads
Kamakura Blog: The Links between CDS Spreads and Default Probabilities More...
Kamakura Risk Information Services default probabilities are designed to send clients "true signal," with no caps, floors, or smoothing of the default rates that come from Kamakura's reduced form, Merton and hybrid credit models. Clients can impose caps, floors or a smoothing technique themselves, they tell us, and we shouldn't hide the information in the models with such artificial constraints on default probabilities. Because of that, we're often asked why other analysts impose a cap on the maximum default rate in their credit models. This post discusses the problems that a cap creates and discusses the other motivations for a cap on default rates. Read More »
Kamakura Risk Information Services default probabilities are designed to send clients "true signal," with no caps, floors, or smoothing of the default rates that come from Kamakura's reduced form, Merton and hybrid credit models. Clients can impose caps, floors or a smoothing technique themselves, they tell us, and we shouldn't hide the information in the models with such artificial constraints on default probabilities. Because of that, we're often asked why other analysts impose a cap on the maximum default rate in their credit models. This post discusses the problems that a cap creates and discusses the other motivations for a cap on default rates.
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Our recent post on the problems with the copula approach for CDO valuation (The Copula Approach to CDO Valuation: A Post Mortem, April 9, 2009) summaries the areas where simplifying assumptions produced tractable answers that had little link to reality. If the copula approach has serious problems, what are the alternatives? We explore that question in this post. Read More »
Our recent post on the problems with the copula approach for CDO valuation (The Copula Approach to CDO Valuation: A Post Mortem, April 9, 2009) summaries the areas where simplifying assumptions produced tractable answers that had little link to reality. If the copula approach has serious problems, what are the alternatives? We explore that question in this post.
Frank Partnoy is one of the most astute observers of Wall Street and the investment process. In these comments before the Securities and Exchange Commission, Frank makes some very important points regarding the need for both the U.S. government and investors in general to diversify away from the traditional credit rating agencies. We are grateful to Professor Partnoy for his permission to reproduce his testimony in this post. Read More »
Frank Partnoy is one of the most astute observers of Wall Street and the investment process. In these comments before the Securities and Exchange Commission, Frank makes some very important points regarding the need for both the U.S. government and investors in general to diversify away from the traditional credit rating agencies. We are grateful to Professor Partnoy for his permission to reproduce his testimony in this post.
The classic book for expectant parents, What to Expect When You're Expecting (by Heidi Murkoff and Sharon Mazel), ranks 65th of the 2 million books on amazon.com for a very good reason: it helps people who are about to do something unlike anything they've ever done before to get ready for what's ahead with more accurate expectations and better preparation than they would have otherwise had. The same kind of primer is necessary for the owners of CDO tranches, many of them happily thinking "It's just like a bond." Unfortunately, CDO tranches are nothing like bonds. With a very high probability, they are "heaven or hell" securities which, with very high probability, leave the owner either with all of his principal returned or none of it returned. This blog entry tells why. Read More »
The classic book for expectant parents, What to Expect When You're Expecting (by Heidi Murkoff and Sharon Mazel), ranks 65th of the 2 million books on amazon.com for a very good reason: it helps people who are about to do something unlike anything they've ever done before to get ready for what's ahead with more accurate expectations and better preparation than they would have otherwise had. The same kind of primer is necessary for the owners of CDO tranches, many of them happily thinking "It's just like a bond." Unfortunately, CDO tranches are nothing like bonds. With a very high probability, they are "heaven or hell" securities which, with very high probability, leave the owner either with all of his principal returned or none of it returned. This blog entry tells why.
Detective Lord Peter Wimsey said in 1927, "I have a trivial mind. Detail delights me." (Dorothy L, Sayers, Unnatural Death, HarperCollins Publishers, page 5). This is the right attitude for an analyst seeking either to build a credit model or to validate someone else's. How much data is needed for this exercise? This is a frequently debated question, but the answers are very simple. First, no one in the world has ever had more data than they needed for a default model--everyone wants more data than they have. Second, simple rules of thumb about how much data is necessary are just that: simple. The real world is more complex than those rules allow. This post summarizes some of the lessons learned in 15 years of credit risk modeling at Kamakura Corporation on counterparties that span the full spectrum, from retail borrowers to small businesses, public firms, and sovereigns. Read More »
Detective Lord Peter Wimsey said in 1927, "I have a trivial mind. Detail delights me." (Dorothy L, Sayers, Unnatural Death, HarperCollins Publishers, page 5). This is the right attitude for an analyst seeking either to build a credit model or to validate someone else's. How much data is needed for this exercise? This is a frequently debated question, but the answers are very simple. First, no one in the world has ever had more data than they needed for a default model--everyone wants more data than they have. Second, simple rules of thumb about how much data is necessary are just that: simple. The real world is more complex than those rules allow. This post summarizes some of the lessons learned in 15 years of credit risk modeling at Kamakura Corporation on counterparties that span the full spectrum, from retail borrowers to small businesses, public firms, and sovereigns.
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