Publish In |
International Journal of Management and Applied Science (IJMAS)-IJMAS |
Journal Home Volume Issue |
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Issue |
Volume-3,Issue-8 ( Aug, 2017 ) | |||||||||
Paper Title |
A Structural Approach for Integrating the Default-Risk of Fixed Income Securities in Economic Scenario Generators | |||||||||
Author Name |
Eric Dei Ofosu-Hene | |||||||||
Affilition |
Department of Finance, University of Ghana Business School, Ghana, P. O. Box LG, 78, Legon-Accra, Ghana | |||||||||
Pages |
21-29 | |||||||||
Abstract |
Previous studies on stochastic asset models have ignored the default-risk of fixed income securities. However developments in the global financial markets indicate thatsovereign bonds, domestic government and corporate bonds carry significant credit risk and that a risk-free domestic government debt which guarantees a rate of return is unavailable. In this paper we examine the effects of varying the default-probability onthe return dynamics of domestic government debt using an economic scenario generator. We provide the implications of ignoring the default-probability of fixed income securities, taking Ghana as an example. The analysis via a multi-period asset projection model and under a CAPM framework indicates that ignoring the default probability of fixed income securities in general can lead to serious underestimation of portfolio risks. Keywords: Economic Scenario Generator, CAPM, Default-Risk, Domestic Government bonds, Ghana, Credit Risk, Market Risk, Multivariate Lognormal Model. | |||||||||
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