Managing Credit Risk in Corporate Bond Portfolios: A Practitioner's Guide


With this clear and comprehensive guide, the reader has an excellent basis on which to build up an advanced credit risk management system. Ramaswamy provides clear answers to important questions such as tail dependence and relative credit risk measures while keeping the right balance between practical relevance and technical sophistication.
–Dr. Yue Sung, Head of Risk Control, Deutsche Bundesbank

"This book bridges the gap between theory and practice in the quantitative management of corporate bond portfolios. Different distributional assumptions are utilized and discussed in the context of practical portfolio management examples. I recommend this book to practitioners as a useful introduction to the quantitative issues of corporate bond portfolio management."
–Lev Dynkin, Managing Director
Lehman Brothers, Quantitative Portfolio Strategies

In Managing Credit Risk in Corporate Bond Portfolios: A Practitioner’s Guide, investment expert Srichander Ramaswamy skillfully explains how you can begin to measure and manage the relative credit risk of a co rporate bond portfolio against its benchmark. By combining risk management concepts with portfolio construction techniques, and examining the role that quantitative methods play in the integration process, this comprehensive guide provides much-needed answers to numerous corporate bond portfolio management questions. Filled with practical advice and challenging end-of-chapter questions, this book can help you become a better-informed and more efficient player in the financial system–whether you’re an institutional investor in need of important risk guidelines or a portfolio manager looking to rebalance positions.

Srichander Ramaswamy is Head of Investment Analysis at the Bank for International Settlements (BIS) in Basel, Switzerland, and Adjunct Professor of Banking and Finance, University of Lausanne. Previously, he was a financial engineer with Credit Suisse in Zurich. Dr. Ramaswamy is a contributor to the Journal of Portfolio Management and other professional journals. He holds a PhD in aerospace engineering from the University of Cincinnati.


Chapter 1. Introduction.


Summary of the Book.

Chapter 2. Mathematical Preliminaries.

Probability Theory.

Linear Algebra.


Chapter 3. The Corporate Bond Market.

Features of Corporate Bonds.

Corporate Bond Trading.

Role of Corporate Bonds.

Relative Market Size.

Historical Performance.

The Case for Corporate Bonds.


Chapter 4. Modeling Market Risk.

Interest Rate Risk.

Portfolio Aggregates.

Dynamics of the Yield Curve.

Other Sources of Market Risk.

Market Risk Model.


Chapter 5. Modeling Credit Risk.

Elements of Credit Risk.

Quantifying Credit Risk.

Numerical Examples.


Chapter 6. Portfolio Credit Risk.

Quantifying Portfolio Credit Risk.

Default Correlation.

Default Mode: Two-Bond Portfolio.

Estimating Asset Return Correlation.

Credit Risk Under Migration Mode.

Numerical Example.


Chapter 7. Simulating the Loss Distribution.

Monte Carlo Methods.

Credit Loss Simulation.

Tail Risk Measures.

Numerical Results.


Chapter 8. Relaxing the Normal Distribution Assumption.


Portfolio Credit Risk.

Loss Simulation.



Chapter 9. Risk Reporting and Performance Attribution.

Relative Credit Risk Measures.

Marginal Credit Risk Contribution.

Portfolio Credit Risk Report.

Portfolio Market Risk Report.

Performance Attribution.


Chapter 10. Portfolio Optimization.

Portfolio Selection Techniques.

Optimization Methods.

Practical Difficulties.

Portfolio Construction.

Portfolio Rebalancing.

Devil in the Parameters: A Case Study.


Chapter 11. Structured Credit Products.

Introduction to CDOs.

Anatomy of a CDO Transaction.

Major Sources of Risk in CDOs.

Rating a CDO Transaction.

Tradable Corporate Bond Baskets.


Solutions to End-of-Chapter Questions.