This paper describes a model for calculating spread values and effective durations of Danish mortgage-backed bonds. Mortgage backed bonds differ in various aspects from garden-variety bonds: In addition to interest rate risk, they are exposed to both borrower and bank credit risk, and to mortgage specific prepayment risk, i.e., the fact that some mortgagors prepay the principal of their loans ahead of schedule when it becomes financially advantageous for them to do so.

We developed an Implied Prepayment model to calculate spread values and effective Durations for Danish Mortgage Backed Bonds (MBB). By using an implied prepayment model, constructed by fitting a generic functional form to market prices of liquid Danish MBB, we take the market price of prepayment risk into account and produce consistent results. Since only current pricing data are used as a model input this approach does not require access to a historical database of prepayment data. This will...

Comprehensive overview of the use of factor models for fixed income risk modeling.

This paper describes an empirically motivated model of credit risk based on a study of the relation between returns to corporate bonds, government bonds and equities.

In recent years, the growth of the global credit market has been spectacular. From an investor perspective, this has created many new opportunities for higher returns and diversification, but a careful management of risk is more necessary than ever. In this context, measures of credit quality are becoming an increasingly important reference. Agency ratings are a standard measure of credit quality. The question of capital requirements and the recent collapse of several high-profile large...

We describe an empirically motivated model of credit risk based on a study of the relation between returns to corporate bonds, government bonds and equities.  Examining almost 200,000 monthly return events spanning 6+ years, we find a clear systematic relationship between issuer credit quality, as measured by its bonds' yield spreads, an the attribution of its bonds' return to interest rate changes and the issuer's equity return.  Returns to high quality bond, with low...

In recent years, the growth of the global credit market has been spectacular. From an investor perspective, this has created many new opportunities for higher returns and diversification, but a careful management of risk is more necessary than ever. In this context, measures of credit quality are becoming an increasingly important reference. Agency ratings are a standard measure of credit quality. The question of capital  requirements and the recent collapse of several high-profile large...

Barra is releasing a newly constructed global model of credit risk providing forecasts of asset and portfolio risk due to market-wide spread changes and issuer-specific credit events. The global credit risk model provides detailed factor models for four major markets, covering credit-risky bonds denominated in US dollars, yen, sterling and euro, and simpler sway-based models of credit spread risk in other markets. In addition, the model incorporates factors for bonds of 26 emerging market...