Economic theory tells us that market and credit risks are intrinsically related to each other and not separable. We describe the two main approaches to pricing credit risky instruments: the structural approach and the reduced form approach. It is argued that the standard approaches to credit risk management – CreditMetrics, CreditRisk+ and KMV – are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk. Empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with Treasury bond index returns than do low yield bonds. Also, macro economic variables appear to influence the aggregate rate of business failures. The CreditMetrics, CreditRisk+ and KMV methodologies cannot reproduce these empirical observations given their constant interest rate assumption. However, we can incorporate these empirical observations into the reduced form of Jarrow and Turnbull (1995b). Drawing the analogy. Risk 5, 63–70 model. Here default probabilities are correlated due to their dependence on common economic factors. Default risk and recovery rate uncertainty may not be the sole determinants of the credit spread. We show how to incorporate a convenience yield as one of the determinants of the credit spread. For credit risk management, the time horizon is typically one year or longer. This has two important implications, since the standard approximations do not apply over a one year horizon. First, we must use pricing models for risk management. Some practitioners have taken a different approach than academics in the pricing of credit risky bonds. In the event of default, a bond holder is legally entitled to accrued interest plus principal. We discuss the implications of this fact for pricing. Second, it is necessary to keep track of two probability measures: the martingale probability for pricing and the natural probability for value-at-risk. We discuss the benefits of keeping track of these two measures.

This paper develops a new measure of the quality of business environment that complements existing measures of the quality of life. An annual panel of these measures is constructed and analyzed for 37 cities from 1977 to 1995. Findings indicate that many cities attractive to firms are unattractive to households, and vice versa. In addition, the size of a city's workforce increases with improvements in the quality of the business environment. In contrast, cities most likely to be dominated by retirees are those that are less attractive to firms. Additional specifications support theoretical arguments that retirees are drawn to cities in which local attributes are capitalized into lower wages rather than higher rents.

A multinomial logit model of household location choice, in which families choose from a number of mutually exclusive residential location, is estimated. Regression results indicate that the locational choices of white and black households are importantly, but differently, affected by their socioeconomic characteristics; in that regard, black suburbanization patterns are little influenced by large simulated changes in household characteristics. Findings suggest that policies which focus on the educational and earnings opportunities of blacks would likely be largely ineffectual in fostering the integration of predominantly white suburban communities. Copyright 1989 by MIT Press.

Abstract Reviews the book "Business and Personal Taxes," by Catherine E. Miles and Joseph E. Lane.

AbstractThis article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default. We apply the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate. Arbitrage-free valuation techniques are then employed. This methodology can be applied to corporate debt and over the counter derivatives, such as swaps and caps.

ABSTRACT This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default. We apply the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a “spot exchange rate.” Arbitrage‐free valuation techniques are then employed. This methodology can be applied to corporate debt and over the counter derivatives, such as swaps and caps.