Credit Risk of an International Bond Portfolio: A Case Study

Nisso Bucay · Dan Rosen

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Credit Risk and Financial Regulations Global Financial Crisis and Policies Financial Risk and Volatility Modeling

Abstract

We apply the CreditMetrics methodology to estimate the credit risk of a portfolio of long-dated corporate and sovereign bonds issued in emerging markets. Credit risk is decomposed into default and downgrade risk. We assess the sensitivity of the loss distribution to various parameters. Asset correlations and transition probabilities have the highest impact on portfolio credit losses. As expected, estimates based on transition matrices published by rating agencies are similar, but differ from those using a transition matrix from KMV Corporation. Changes in the risk-free rate result in small changes to the mark-to-market value of the test portfolio, and thus to the losses.

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1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1999Coherent Measures of Risk 2000A comparative analysis of current credit risk models 1998Portfolio Credit Risk 1999Reconcilable Differences 1998A Comparative Anatomy of Credit Risk Models

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