Inflation Targeting Pillars: Transparency and Accountability, Issues 2009-2262

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International Monetary Fund, Dec 1, 2009 - Business & Economics - 19 pages
Credit Default Swap spreads have been used as a leading indicator of distress. Default probabilities can be extracted from CDS spreads, but during distress it is important to take account of the stochastic nature of recovery value. The recent episodes of Landbanski, WAMU and Lehman illustrate that using the industry-standard fixed recovery rate assumption gives default probabilities that are low relative to those extracted from stochastic recovery value as proxied by the cheapest-to-deliver bonds. Financial institutions using fixed rate recovery assumptions could have a false sense of security, and could be faced with outsized losses with potential knock-on effects for other institutions. To ensure effective oversight of financial institutions, and to monitor the stability of the global financial system especially during distress, the stochastic nature of recovery rates needs to be incorporated.

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Contents

Transparency
3
Communicating the Risks Surrounding the Forecast
10
References
17
Copyright

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About the author (2009)

Charles Freedman is a Senior Flash Developer for Yahoo! with a communications degree in film and television from Boston University. His development approach combines an education in multimedia with expertise and passion for building engaging and intuitive applications and content.
In recent years, Charles has produced some of the most highly visible Flash platform work, leading development for Yahoo! Maps and deploying modules for the home pages of eBay, eBay China and Fidelity. Born in Boston, Charles relocated with his wife Jamie to sunny Santa Clara, California, to join Yahoo! in 2005. Still a season ticket holder, he plans many trips back East to see his beloved Red Sox win another World Series.

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