Testing the Performance of Creditmetrics After 2007 Credit Crisis
The University of Southampton2009/10Faculty of Law, Arts and Social SciencesSchool of ManagementMSc DissertationTesting the Performance of CreditMetrics after 2007 Credit Crisis:An Empirical Analysis23701536Presented for MSc. International Financial MarketThis project is entirely the original work of student registration number 23701536. Where material is obtained from published or unpublished works, this has been fully acknowledged by citation in the main text and inclusion in the list of references.Word Count: 13069 words (excluding figures and tables)AbstractThis dissertation used CreditMetrics as a representative to test the performance of rating-based credit risk models. CreditMetrics was run on corporate bonds domiciled in U.S. and Europe over a 114-month period from July 1999 to December 2008, with the focus on the period of 2007 credit crisis. The model’s performance was estimated through comparing the actual returns of bond portfolios with the credit VaR calculated from CreditMetrics.This study concluded that CreditMetrics is generally accurate in most cases over the long run. However, in the case of high risk assets CreditMetrics underestimated the risk. Moreover, in the period of crises, CreditMetrics was proved to be vulnerable under high stress. This suggested that in extreme time, or for the high risk portfolios, CreditMetrics should be used with caution by choosing relatively conservative parameters.
Keywords: CreditMetrics; VaRAcknowledgementI am grateful to Steven Kurtosi from Standard & Poor’s, who I never met, who provided comprehensive data for this study without repayment, and who aided me in the most difficult time of this study. I would like also to express my gratitude to Dr. Declan Hayes, who took over the supervision responsibility and offered his generous help, dedication and expertise.Table of ContentsAbstract Acknowledgement Table of Contents List of Tables List of Figures 1. Introduction