Can quantitative approaches may add credit value?
In determining if quantitative approaches may add value, and which model is best suited, both investment horizon and performance targets as well as credit-specific characteristics should be considered. We would distinguish those investors who are concerned with mark-to-market fluctuations from those who are focused on absolute return to maturity. The latter may find the long-term signals provided by credit analysts, rating agencies and quantitative models to be more relevant than market expectations that are reflected in credit spreads and implied default probabilities. In the portfolio context, quantitative tools are particularly helpful to determine the risks associated with correlated defaults. Absolute return investors enjoy more freedom to implement relative value trades than those investors that may not deviate substantially from a given benchmark index.
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