The Journal of Fixed Income 

About: The Journal of Fixed Income is an academic journal published by Euromoney Institutional Investor. The journal publishes majorly in the area(s): Bond & Credit risk. It has an ISSN identifier of 1059-8596. Over the lifetime, 841 publications have been published receiving 17503 citations. The journal is also known as: Journal of Fixed Income.

On Default Correlation: A Copula Function Approach

Abstract: This article studies the problem of default correlation. It introduces a random variable called “time-until-default” to denote the survival time of each defaultable entity or financial instrument, and defines the default correlation between two credit risks as the correlation coefficient between their survival times. The author explains why a copula function approach should be used to specify the joint distribution of survival times after marginal distributions of survival times are derived from market information, such as risky bond prices or asset swap spreads. He shows that the current approach to default correlation through asset correlation is equivalent to using a normal copula function. Numerical examples illustrate the use of copula functions in the valuation of some credit derivatives, such as credit default swaps and first-to-default contracts.

Maximum Likelihood Estimation for a Multifactor Equilibrium Model of the Term Structure of Interest Rates

Abstract: LOUIS SCOTT is associate professor of finance at the University of Georgia in Athens. model of the term structure of interest necessary for the valuation of bonds and interest rate options; and parameter valestimates, are necessary for the implementation of a specific model. This article presents a method for estimating the parameters of a particular class of continuous-time equilibrium models of the term structure. The theoretical framework for the analysis is the model of Cox, Ingersoll, and Ross [1985a, 1985b1, where a general equilibrium model of asset pricing is used to examine the behavior of the term structure and related issues such as the valuation of interest ratecontingent claims. The Cox, Ingersoll, Ross model, hereafter the CIR model, is a single-factor equilibrium model of the term structure that is consistent with an asset pricing equilibrium, free of arbitrage opportunities, and retains the feature that the interest rate must be non-negative. The one-factor model, however, has the undesirable property that all bond returns are perfectly correlated, and it may not be adequate to characterize the term structure of interest rates and its changing shape over time. The advantage of this one-factor model is the relatively simple closed-form solution for bond prices. As CIR show, the model can be extended to a multifactor setting, with closed-form solutions for bond prices. We follow suggestions in CIR and develop a multifactor equilibrium model of the term structure. The primary objective is to estimate the parameters of the processes that drive interest rate changes and determine the number of factors necessary to characterize the term structure adequately over time. This analysis

The Credit Rating Industry

Abstract: Investors and regulators have been increasing their reliance on the opinions of the credit rating agencies. This article shows that although the ratings provide accurate rank-orderings of default risk, the meaning of specific letter grades varies over time and across agencies. Noting that current regulations do not explicitly adjust for agency differences, the authors argue that a reassessment of the use of ratings and the adequacy of public oversight is overdue.

Asset Allocation: Combining Investor Views with Market Equilibrium

Abstract: nvestors create global bond portfolios for a variety of reasons: to diversify interest rate risk, to manage yield, to control exposure to foreign currencies, and to enlarge the universe of possible trading opportunities. This article describes a new approach to international asset allocation of fured-income securities. We show how to construct portfolios by choosing the optimal weights to invest in assets in each country and the optimal degree of hedging of currency exposure, given the investor's views for interest rates and exchange rates. While our approach brings several new features to the traditional asset allocation problem, its most innovative contribution is to allow investors to compare their outlook for currencies and interest rates with expected returns generated by an International Capital Asset Pricing Model (ICAPM) equilibrium. The simple idea that expected returns ought to be consistent with market equilibrium, except to the extent that the investor explicitly states otherwise, turns out to be of critical importance in making practical use of the model. In particular, it allows investors to specifj views in a much more flexible way than otherwise would be permitted. For example, rather than requiring investors to specify views about absolute returns on every asset, our approach allows investors to specifj as many or as few views as they wish views with different degrees of confidence and views about relative returns on different assets. This use of the expected returns associated with asset market equilibrium as a reference point for investors is a unique feature of the model. Much of our article focuses on this aspect of our approach.' Another advantage to our approach is that it jointly determines the optimal allocations of bonds into differI