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Do Leveraged Credit Derivatives Modify Credit Allocation ?

Viala, Jean-Renaud; Boulier, Jean-François; Brière, Marie (2007-11), Do Leveraged Credit Derivatives Modify Credit Allocation ?, EDHEC Symposium « Risk and Asset Management », 2008-04, Nice, France

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RePEc_sol_wpaper_08-014.pdf (132.1Kb)
Type
Communication / Conférence
Date
2007-11
Conference title
EDHEC Symposium « Risk and Asset Management »
Conference date
2008-04
Conference city
Nice
Conference country
France
Metadata
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Author(s)
Viala, Jean-Renaud
Boulier, Jean-François
Brière, Marie
Abstract (EN)
This paper examines how credit derivatives have changed the construction of an efficient portfolio. Credit derivatives provide a way of gaining exposure to credit risk alone, to the exclusion of interest rate risk. They also permit a relatively easy use of leverage. We examine two types of allocation : the first is a conventional investment in government bonds, corporate bonds (investment grade and high yield) and equities in the United States; the second replaces corporate bonds with credit derivatives, which may also be leveraged. We look at past data on returns, risk and correlations of these investments, and we show that the credit risk component seems to have a strongly diversifying effect relative to the traditional asset classes, i.e. equities and government bonds. We then compute efficient frontiers within a standard mean- variance framework. The results show the advantages of credit derivatives for portfolio diversification, and the usefulness of leveraging this investment to extend the limits of the efficient frontier.
Subjects / Keywords
Credit derivatives; credit risk; equities; government bonds; investments; Allocation; portfolio
JEL
G13 - Contingent Pricing; Futures Pricing
G24 - Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
G11 - Portfolio Choice; Investment Decisions

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