Book: Financial Risk Manager Handbook Plus Test Bank
Author: Philippe Jorion
ISBN: 978-0-470-90401-5
Chapter 21 flips the lens. Instead of counting defaults from rating agency history, you read credit risk from prices. Markets are forward-looking, update fast, and aggregate scattered information. They also embed risk premia, liquidity premia, and tax effects. Jorion walks through both the power and the traps.
Book: Financial Risk Manager Handbook Plus Test Bank
Author: Philippe Jorion
ISBN: 978-0-470-90401-5
Chapter 19 opens the credit risk block of the handbook, and Jorion does not sugarcoat it. Credit risk is harder to measure than market risk. It matters more for most banks. And models that looked fine in quiet times fell apart in 2007-2008.
In Chapter 39 we valued default risk by modeling the firm’s assets, earnings, and cash. That is the “look inside the company” approach. Chapter 40 takes a completely different path. Instead of trying to understand why a company might default, just model default as a random external event. Roll a die. If you get a 1, the company defaults. Simple.
Government bonds had 13 sovereign issuers to choose from. Corporate bonds? Try over 3,000 issuers and 15,000 individual bonds across developed markets alone.