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On the dynamical risk properties of a bond portfolio

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In this thesis a study of a portfolio of defaultable bonds and swaps is performed. The focus is on the modeling and determination of risk premia associated with different types of risk linked to the portfolio. This comprises the market and credit risk and a default contingent market risk associated with the swaps.

Different models are used to investigate the various risks. The market risk is analyzed via Value-at-Risk. The credit risk is described by the portfolio's loss distribution. Its calculation is based on a correlation expansion technique, which enables fast analytical computation of relevant expectation values. The default contingent market risk is modeled via EPE-profiles familiar from counterparty risk. The theoretical predictions are compared with results from a dynamical portfolio simulation.

The results of this dissertation are twofold. Firstly, it is shown how the default contingent market risk can be modeled and consistently integrated into the full risk framework. The importance of the modeling issue of the default contingent market risk is highlighted. Secondly, it is shown that the analytical results regarding the correlation expansion of a Gaussian copula can be extended to other copulas as well. An implementation of the correlation expansion method is provided.

Reference no: EM134828

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