Tag Archives: money management

A credit discriminatory pricing rule

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The models presented in the previous chapters describe the price formation process in markets with different  structures. As we saw in the previous article, among the markets with trade pricing rules, those governed by an order-driven execution system can be organized either as a continuous or as a call auction, while markets with a quote-driven [...]

Investors require a premium for taking on credit risk

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Investors require a premium for taking on credit risk. Not only does this premium, in other words the credit spread, have to increase with decreasing credit quality, but one also expects a higher sensitivity of spreads to changes of the fundamental environment for lower rated credits. As pointed out earlier, the assets of a company [...]

Lagging indicators of credit quality

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While in a single name context ratings are often criticized for being lagging indicators of credit quality, classifying bonds by rating is one widely used method to reflect the behavior of different risk classes in credit markets.
Many market participants argue that spreads themselves and spread volatilities are more timely indicators of an issuer’s credit risk [...]

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