Paper Title :A Structural Approach for Integrating the Default-Risk of Fixed Income Securities in Economic Scenario Generators

Author :Eric Dei Ofosu-Hene

Article Citation :Eric Dei Ofosu-Hene , (2017 ) " A Structural Approach for Integrating the Default-Risk of Fixed Income Securities in Economic Scenario Generators " , International Journal of Management and Applied Science (IJMAS) , pp. 21-29, Volume-3,Issue-8

Abstract : Previous studies on stochastic asset models have ignored the default-risk of fixed income securities. However developments in the global financial markets indicate thatsovereign bonds, domestic government and corporate bonds carry significant credit risk and that a risk-free domestic government debt which guarantees a rate of return is unavailable. In this paper we examine the effects of varying the default-probability onthe return dynamics of domestic government debt using an economic scenario generator. We provide the implications of ignoring the default-probability of fixed income securities, taking Ghana as an example. The analysis via a multi-period asset projection model and under a CAPM framework indicates that ignoring the default probability of fixed income securities in general can lead to serious underestimation of portfolio risks. Keywords: Economic Scenario Generator, CAPM, Default-Risk, Domestic Government bonds, Ghana, Credit Risk, Market Risk, Multivariate Lognormal Model.

Type : Research paper

Published : Volume-3,Issue-8

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