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 Credit VAR (credit at risk) 
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Joined: 28 Feb 2013
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I am not sure I understand the concept of credit VAR. Why the credit manager should also be concerned with the upper tail outcome?. The books mention something about an increase in the value of the assets could increase the propensity of the debtor to refinance? Is that because an increase in assets would the direct consequence of a fall in int rates?
Thx,


15 Mar 2013
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Joined: 28 Feb 2013
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I wasn’t convinced by that explanation either. But i will any way reexplain some thing of which i am not convinced but will go along for exam sake.
Normally Value at risk focusses on the risk in the lower tail, which is risk of loosing money or value or cashflow. For MBS and other refinancable debt instruments, a big risk is interest rate risk. As interest rates fall, people refinance and you loose your price upside. This is the upper tail risk.
Upper tail risk is risk of loosing the upside price increase in bonds because people refinance as interest rates fall, if they have an option to refinance.
Hope it makes sense.
Cheers :)


15 Mar 2013
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Joined: 28 Feb 2013
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This never made sense to me either. Shouldn’t credit VAR be about default? I don’t see the possibility of limited upside caused by the negative convexity to be credit related- more interest rate risk related.
Therefore shouldn’t the lower tail be used?


15 Mar 2013
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Thank you!


15 Mar 2013
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Joined: 28 Feb 2013
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One thing you all should remember is how reinvestment risk fits into credit VAR. As rates decline prepayment speeds increase causing you to recieve more money back from your bonds/loans at the worst possible time. This is bad because you then have to REINVEST the capital in lower yielding assets which then jacks up your expected return.


15 Mar 2013
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The reasoning isnt very plausible i think. But I read it like they say the creditor’s risk increases as the value of the asset (i.e money he is owed increases). The VaR is therefore that amount at the top end tail.
Arrggg I dont know.


15 Mar 2013
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Joined: 01 Jun 2016
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When the market value of a bond increases for an investor, this increases the present value of the liability for the issuer, as well. I assume that this means a credit event is more likely, as the issuer will appear more leveraged. This would only happen in the upper tail of returns, because smaller total returns to the investor would indicate diminishing present value of liabilities for the issuer.


01 Jun 2016
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