Testing the Performance of Creditmetrics After 2007 Credit Crisis

The University of Southampton

2009/10

Faculty of Law, Arts and Social Sciences

School of Management

MSc Dissertation

Testing the Performance of CreditMetrics after 2007 Credit Crisis:

An Empirical Analysis

23701536

Presented for MSc. International Financial Market

This project is entirely the original work of student registration number 23701536. Where material is obtained from published or unpublished works, this has been fully acknowledged by citation in the main text and inclusion in the list of references.

Word Count: 13069 words (excluding figures and tables)

Abstract

This dissertation used CreditMetrics as a representative to test the performance of rating-based credit risk models. CreditMetrics was run on corporate bonds domiciled in U.S. and Europe over a 114-month period from July 1999 to December 2008, with the focus on the period of 2007 credit crisis. The model’s performance was estimated through comparing the actual returns of bond portfolios with the credit VaR calculated from CreditMetrics.

This study concluded that CreditMetrics is generally accurate in most cases over the long run. However, in the case of high risk assets CreditMetrics underestimated the risk. Moreover, in the period of crises, CreditMetrics was proved to be vulnerable under high stress. This suggested that in extreme time, or for the high risk portfolios, CreditMetrics should be used with caution by choosing relatively conservative parameters.

Keywords: CreditMetrics; VaR

Acknowledgement

I am grateful to Steven Kurtosi from Standard & Poor’s, who I never met, who provided comprehensive data for this study without repayment, and who aided me in the most difficult time of this study. I would like also to express my gratitude to Dr. Declan Hayes, who took over the supervision responsibility and offered his generous help, dedication and expertise.

Table of Contents

Abstract        

Acknowledgement        

Table of Contents        

List of Tables        

List of Figures        

1.        Introduction