Sufficient Diversification in Credit Portfolios

The relationship between credit default swap spreads, bond yields, and credit rating announcements

“…By contrast, Hite and Warga (1997) find that the strongest bond price reaction is associated with downgrades to and within the non-investment grade class. Their findings are confirmed by Dynkin et al (2002) who report significant underperformance during the period leading up to downgrades with the largest underperformance being observed before downgrades to below investment grade. A recent study by Steiner and Heinke (2001) uses Eurobond data and detects that negative reviews and downgrades cause abnormal negative bond returns on the announcement day and the following trading days but no significant price changes are observed for upgrades and positive review announcements.…”

On the relationship between credit rating announcements and credit default swap spreads for European reference entities

“…Wansley et al (1992) and more recently Dynkin et al (2002) confirm that bond prices decrease during the period before and after the announcement of a downgrade. In a recent study, Steiner and Hanke (2001) conclude that negative reviews and downgrades result in negative bond returns after the announcement, but find no effects for positive reviews and upgrades.…”

Integrating market and credit risk: A simulation and optimisation perspective

“…Some of these methods build on the mean-variance analysis of Markowitz where the mean and variance refer to the actual loss distribution of the portfolio (e.g. Kealhofer, 1998;Ramaswamy, 2002, or Dynkin et al, 2001. For a general discussion of portfolio construction using alternative risk measures the readers are referred to Mitra et al (2003).…”