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Corporate Bond and Commercial Loan Portfolio Analysis

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  • Edward I. Altman

Abstract

In this paper we have presented a new approach to measure the return-risk trade-off in portfolios of risky debt instruments, whether bonds or loans. The use of complex, statistically based portfolio techniques to manage assets of financial institutions and fixed income portfolio money managers is very much in its early phase and will continue to evolve, perhaps more quickly in the near future. Our approach substitutes the concept of unexpected loss for the more traditional variance of return measure used in equity securities analysis. Preliminary empirical tests indicate some reason to be optimistic about this approach. This paper was presented at the Financial Institutions Center's October 1996 conference on "
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Suggested Citation

  • Edward I. Altman, 1996. "Corporate Bond and Commercial Loan Portfolio Analysis," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-6, New York University, Leonard N. Stern School of Business-.
    • Handle: RePEc:fth:nystfi:96-6
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    References listed on IDEAS

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    1. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119-119.
    2. Scott, James, 1981. "The probability of bankruptcy: A comparison of empirical predictions and theoretical models," Journal of Banking & Finance, Elsevier, vol. 5(3), pages 317-344, September.
    3. Chirinko, Robert S. & Guill, Gene D., 1991. "A framework for assessing credit risk in depository institutions: Toward regulatory reform," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 785-804, September.
    4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
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    6. repec:bla:jfinan:v:44:y:1989:i:4:p:909-22 is not listed on IDEAS
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Hull, John & White, Alan, 1995. "The impact of default risk on the prices of options and other derivative securities," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 299-322, May.
    9. Bennett, Paul, 1984. "Applying portfolio theory to global bank lending," Journal of Banking & Finance, Elsevier, vol. 8(2), pages 153-169, June.
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    Cited by:

    1. Henke, Sabine & Burghof, Hans-Peter & Rudolph, Bernd, 1998. "Credit securitization and credit derivatives: Financial instruments and the credit risk management of middle market commercial loan portfolios," CFS Working Paper Series 1998/07, Center for Financial Studies (CFS).
    2. Mencía, Javier, 2012. "Assessing the risk-return trade-off in loan portfolios," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1665-1677.
    3. Jarrow, Robert A. & Turnbull, Stuart M., 2000. "The intersection of market and credit risk," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 271-299, January.
    4. Justin A. Sirignano & Gerry Tsoukalas & Kay Giesecke, 2016. "Large-Scale Loan Portfolio Selection," Operations Research, INFORMS, vol. 64(6), pages 1239-1255, December.
    5. Petr Jakubík & Petr Teplý, 2011. "The JT Index as an Indicator of Financial Stability of Corporate Sector," Prague Economic Papers, Prague University of Economics and Business, vol. 2011(2), pages 157-176.

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