Credit risk measurement and modelling
type: CreativeWork
description: This thesis aims to make a contribution to the understanding of the key economic and company specific components of credit spreads in the investment and non-investment grade US bond market for different maturing bond indices. It calls for the full integration of different market andfirm specific variables into a unique framework, in order to predict credit spread changes. Key determinants of default risk are employed to determine credit migration risk. Particularly, this thesis provides evidence as to the relation between different macroeconomic factors and credit spread changes in all different maturities and rating categories, it supports the use of the consumer confidence index, as the most important variable explaining changes in credit spreads in investment and high yield companies, but most importantly it provides support for the strong informational content of high yield spreads as predictors of output growth, based on Option Adjusted Spreads. It favours the inclusion of implied volatilities in explaining credit spread changes, while it criticises the incorporation of historical ones. Throughout the thesis, it becomes evident that BBB-rated bonds exhibit highly volatile patterns and are very difficult to model. Financial ratios adjusted to reflect depreciation and amortisation expenses, which are usually very high for non-investment grade companies, prove to be very important in explaining changes of high yield spreads. However, firm specific risk, accounts only for a small fraction of the variation in the investment grade category. Ultimately, it is shown that by using solely market (equity and macro variables) and firm specific variables, i. e. some of the key determinants of default risk and the price of credit risky debt in most Merton-type models, we can accurately forecast credit spread changes at least one year ahead, particularly based on results provided from the investment grade sample. Moreover, credit spread forecasts, based on our set of OAS, ten…
abstract: This thesis aims to make a contribution to the understanding of the key economic and company specific components of credit spreads in the investment and non-investment grade US bond market for different maturing bond indices. It calls for the full integration of different market andfirm specific variables into a unique framework, in order to predict credit spread changes. Key determinants of default risk are employed to determine credit migration risk. Particularly, this thesis provides evidence as to the relation between different macroeconomic factors and credit spread changes in all different maturities and rating categories, it supports the use of the consumer confidence index, as the most important variable explaining changes in credit spreads in investment and high yield companies, but most importantly it provides support for the strong informational content of high yield spreads as predictors of output growth, based on Option Adjusted Spreads. It favours the inclusion of implied volatilities in explaining credit spread changes, while it criticises the incorporation of historical ones. Throughout the thesis, it becomes evident that BBB-rated bonds exhibit highly volatile patterns and are very difficult to model. Financial ratios adjusted to reflect depreciation and amortisation expenses, which are usually very high for non-investment grade companies, prove to be very important in explaining changes of high yield spreads. However, firm specific risk, accounts only for a small fraction of the variation in the investment grade category. Ultimately, it is shown that by using solely market (equity and macro variables) and firm specific variables, i. e. some of the key determinants of default risk and the price of credit risky debt in most Merton-type models, we can accurately forecast credit spread changes at least one year ahead, particularly based on results provided from the investment grade sample. Moreover, credit spread forecasts, based on our set of OAS, ten…
author: Anastassopoulou, N.
keywords: HG Finance
date published: 2006-12
date modified: 2026-07-24T01:39:14Z
provider: City University of London
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: City University London