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Donald van Deventer
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Donald R. van Deventer founded the Kamakura Corporation in April, 1990 and is currently Chairman and Chief Executive Officer. Dr. van Deventer's emphasis at Kamakura Corporation is enterprise wide risk management and modern credit risk technology. The second edition of his newest book, Advanced... More
My company:
Kamakura Corporation
My blog:
Donald R. van Deventer's Kamakura Blog
My book:
Advanced Financial Risk Management, 2nd Edition 2013
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  • A 13 Quarter CCAR Stress Test Of The U.S. Treasury Curve, August 21, 2014

    (click to enlarge)ccar

    This graph shows the results of a single scenario stress test to the U.S. Treasury yield curve. The simulated yield movements over 13 quarters are generated by a Kamakura Risk Information Services 9 factor Heath Jarrow and Morton model with rate-dependent interest rate volatility. The parameters, which are available from Kamakura Corporation for use in Kamakura Risk Manager, are estimated using quarterly data from 1962 through June 30, 2014. The periodicity (quarterly) and time horizon (13 quarters) matches that of the Federal Reserve 2014 Comprehensive Capital Analysis and Review.

    For more information on Kamakura Corporation's world-wide stress testing services using Kamakura Risk Manager, please contact Kamakura Corporation at

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 22 6:05 PM | Link | Comment!
  • JPMorgan Chase Zero Coupon Bond Yields And Credit Spreads, August 21, 2014

    (click to enlarge)z

    This graph shows the zero coupon yield curve for both the issuer and the U.S. Treasury. Both curves are produced by Kamakura Risk Information Services using Kamakura Risk Manager, version 8.1. The U.S. Treasury curve is created by the maximum smoothness forward rate method of Adams and van Deventer [1994], which was recently confirmed as consistent with "no arbitrage" standards of Heath, Jarrow and Morton in an important paper by Kamakura Managing Director Prof. Robert A. Jarrow. The issuer's zero coupon yield curve was created by applying the maximum smoothness forward rate approach to zero coupon credit spreads, relative to the base U.S. Treasury curve. The underlying senior non-call fixed rate bond data for the issuer was supplied by the TRACE system and processed by Kamakura Risk Manager to minimize the trade-weighted sum of squared pricing errors.

    Zero coupon credit spreads are a critical input to the risk management process, with applications in counterparty credit risk, transfer pricing, stress testing, capital adequacy assessment, market risk and asset and liability management. For more information on KRIS zero coupon yield curve data, please contact For more information on the maximum smoothness forward rate approach, see Chapters 5 and 17 of van Deventer, Imai and Mesler Advanced Financial Risk Management, 2nd edition, John Wiley & Sons, 2013. To subscribe to the Kamakura Risk Information Services credit spread data base, please contact

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: JPM, financials, bonds
    Aug 22 6:03 PM | Link | Comment!
  • The Relationship Between Credit Spreads And Default Probabilities, August 21, 2014

    (click to enlarge)s2kdpbykdp

    The graph shows the credit spread to default probability ratio, ranked by default probability, on all corporate bond trades in the U.S. market which met the following conditions:

    Coupon: Constant fixed rate until maturity

    Maturity: 1 year or more

    Trade volume: $5 million or more

    Seniority: Senior debt

    Callability: Non-call (except for "make whole" calls)

    The credit spread is calculated by comparing the trade-weighted average yield to the matched maturity U.S. Treasury rate supplied by the U.S. Department of the Treasury to the Federal Reserve H15 statistical release. Calculations are by Kamakura Risk Information Services using data from TRACE. In a recent note, we explained why it is incorrect to use the common financial relationship that says credit spreads equal the default probability times (one minus the recovery rate). The graph above is additional evidence that this simple formula is incorrect. For more information please contact

    Background on the Default Probability Models Used

    The Kamakura Risk Information Services version 5.0 Jarrow-Chava reduced form default probability model (abbreviated KDP-JC5) makes default predictions using a sophisticated combination of financial ratios, stock price history, and macro-economic factors. The version 5.0 model was estimated over the period from 1990 to 2008, and includes the insights of the worst part of the recent credit crisis. Kamakura default probabilities are based on 1.76 million observations and more than 2000 defaults. The term structure of default is constructed by using a related series of econometric relationships estimated on this data base. KRIS covers 35,000 firms in 61 countries, updated daily. Free trials are available at An overview of the full suite of Kamakura default probability models is available here.

    Using Default Probabilities in Asset Selection

    We recommend this introduction to the use of default probabilities in fixed income strategy by J.P. Morgan Asset Management.

    General Background on Reduced Form Models

    For a general introduction to reduced form credit models, Hilscher, Jarrow and van Deventer (2008) is a good place to begin. Hilscher and Wilson (2013) have shown that reduced form default probabilities are more accurate than legacy credit ratings by a substantial amount. Van Deventer (2012) explains the benefits and the process for replacing legacy credit ratings with reduced form default probabilities in the credit risk management process. The theoretical basis for reduced form credit models was established by Jarrow and Turnbull (1995) and extended by Jarrow (2001). Shumway (2001) was one of the first researchers to employ logistic regression to estimate reduced form default probabilities. Chava and Jarrow (2004) applied logistic regression to a monthly database of public firms. Campbell, Hilscher and Szilagyi (2008) demonstrated that the reduced form approach to default modeling was substantially more accurate than the Merton model of risky debt. Bharath and Shumway (2008), working completely independently, reached the same conclusions. A follow-on paper by Campbell, Hilscher and Szilagyi (2011) confirmed their earlier conclusions in a paper that was awarded the Markowitz Prize for best paper in the Journal of Investment Management by a judging panel that included Prof. Robert Merton.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 22 6:00 PM | Link | Comment!
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