By Donald van Deventer on
5/18/2010 1:26 PM
In Monday’s blog we talked about the natural bankers’ tendency to judge credit risk tools by how they do on firms, sovereigns or individuals who failed to pay. How they performed on the best credits, those who did pay, gets short shrift. Today’s blog talks about the real business costs of default models that have been inflated to make the default probabilities on the defaulters even higher, knowing that the credit analyst will ignore the inflated default probabilities on the non-defaulters. As we explained Monday, this is a common problem aggravated by the moral hazard of model builders who take advantage of this knowledge.
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By Donald van Deventer on
5/17/2010 12:43 PM
One of the more curious human traits that affects credit modeling is the tendency of the user of a default model to look only at how the model works on firms or individuals that have defaulted, ignoring how the model works on non-defaulters. This tendency can result in very serious errors in both model selection and in day to day business. This post explains why and gives some examples.
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By Donald van Deventer on
5/14/2010 10:13 AM
Today’s forecast for U.S. Treasury yields is based on the May 12, 2010 constant maturity Treasury yields reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release reported at 4:15 pm May 13, 2010. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.
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By Donald van Deventer on
5/13/2010 10:54 AM
On Tuesday, we looked at the volume of trading in sovereign credit default swaps by dealers and non-dealers as reported by the Depository Trust and Clearing Corporation. The surprising conclusion was that the 20 sovereign names on which trading was reported by DTCC had only 1-10 contracts traded daily by non-dealers. In today’s blog, we look at trading in the corporate names reported by DTCC.
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By Donald van Deventer on
5/11/2010 10:56 AM
When people buy a used car in the United States, they often consult prices paid by thousands of others for the same model car that they are considering. Kelly Blue Book is a common source for this kind of information. Another alternative that is much less informative is the prices that have been paid on one used car dealer’s lot. When it comes to the recent near-hysteria in the credit default swap market about Greece and other sovereigns, we need to analyze the volume and sources of information we’re getting on credit default swap quotations. Is the sovereign CDS market the equivalent of the Kelly Blue Book for used cars, with thousands of quotations? Or is it just a few quotes from the equivalent of one used car lot? That is the subject of today’s blog.
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