Defining, Estimating and Using Credit Term Structures. Part 2: Consistent Risk Measures

TL;DR

This paper introduces new, consistent definitions of credit bond duration and convexity across all credit qualities, along with additional risk measures, to improve risk assessment and portfolio construction in credit markets.

Contribution

It presents novel, survival-based risk measures and definitions that are consistent across credit qualities, enhancing credit risk analysis and portfolio management.

Findings

New definitions of credit bond duration and convexity applicable to distressed bonds

Introduction of additional risk measures aligned with survival-based valuation

Method for constructing market neutral portfolios using these risk measures

Abstract

In the second part of our series we suggest new definitions of credit bond duration and convexity that remain consistent across all levels of credit quality including deeply distressed bonds and introduce additional risk measures that are consistent with the survival-based valuation framework. We then show how to use these risk measures for the construction of market neutral portfolios.