| The emphasis of this thesis is two-fold. Chapter 1 analyzes portfolio credit risk in light of dynamic "frailty," by which the credit qualities of different firms depend on common unobservable time-varying default covariates. Frailty is estimated to have a large impact on estimated conditional mean default rates, above and beyond those predicted by observable factors, and to cause a large increase in the likelihood of large default losses for portfolios of U.S. corporate bonds during 1980-2004.; Chapter 2 analyzes the spread components of structured credit products. It is shown that such securities compensate investors for expected losses due to defaults, pure jump-to-default risk, correlation risk, as well as the risk of firm-specific and market-wide adverse changes in credit conditions. We present a framework that allows a decomposition of "structured" credit spreads, and we apply this decomposition to CDX index tranches. Along the way we introduce computational techniques that make a certain class of fully dynamic intensity-based models for portfolio credit risk, just as computationally tractable as the static copula model. |
