Quantitative Credit Portfolio Management: Practical Innovations for Measuring and Controlling Liquidity, Spread, and Issuer Concentration Risk
Created by members of the Quantitative Portfolio Strategy Group at Barclays Capital Research—a recognized authority in this field—Quantitative Credit Portfolio Managementcontains new insights that credit market practitioners, from portfolio managers to research analysts, will find useful, practical, and easy to apply.Written in an intuitive yet quantitatively rigorous style, this timely publication opens with a detailed look at new measures of spread risk, liquidity risk, and Treasury curve risk of credit securities. It presents strong empirical evidence of the benefits these measures offer to portfolio managers compared with current standard industry methods. From there, it moves on to examining applications of these risk measures to portfolio construction and management. The authors also examine the best ways of capturing more of the spread premium in credit portfolios. They explain the reasons that the spread-related returns earned by investment grade credit indices are so much lower than the "promised" returns implied by spreads at issuance.All along the way, the authors maintain a sharp focus on the "out-of-sample" predictive power of their research results and their practical implications, with special attention given to the 2007–2009 credit crisis and the subsequent European sovereign crisis.In this book, the authors:Build a case for a Duration Times Spread (DTS) approach to forecasting spread changes and managing risk in credit portfolios based on their finding that spread volatility is linearly related to spread levelsIntroduce a security-level numeric measure of transaction costs—Liquidity Cost Scores (LCS)—which enables investors to quantify the liquidity component of credit spreads and construct portfolios with desired liquidity characteristicsDemonstrate an approach to optimal diversification of issuer-specific risk in credit portfoliosSuggest downgrade-tolerant credit portfolios as a way to avoid discarding credit spread premium with the forced liquidation of "fallen angels" as they get dropped from investment grade indicesExamine "fallen angels" themselves, as a separate asset class, with superior risk and return characteristicsEach chapter of this innovative publication is based on questions brought to the authors' attention by credit portfolio managers and reflects original research aimed at answering these questions in an objective, quantitative, and intuitive way. All of the new ideas and methodologies discussed throughout these pages were developed as a result of these inquiries. With this book as your guide, you'll gain a solid understanding of best practices in credit portfolio construction.