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- Title
Estimating Credit Risk and Illiquidity Risk in Guaranteed Investment Products.
- Authors
Xiong, James X.; Idzorek, Thomas M.
- Abstract
Guaranteed investment products, including stable value funds, guaranteed investment contracts (GICs), synthetic GICs, bank investment contracts (BICs), deferred fixed annuities, etc., are offered in many defined contribution plans in the United States. These downside guaranteed products can vary significantly from product type to product type, as well as within a given product type. But many of these products share some common characteristics that are not found in traditional marked- to-market products. This paper establishes a flexible framework for estimating credit risk and illiquidity risk for guaranteed products, so their "true" risks are reflected in the inputs to asset- allocation-oriented optimizations. Ignoring or inaccurately estimating illiquidity risk and credit risk can lead to an unjustified preference for guaranteed products. INSETS: Appendix: Morningstar's Distance-to-Default Score;Appendix: Morningstar's Distance-to-Default Score.
- Subjects
CREDIT risk; GUARANTEED investment contracts; BANK investment contracts; ANNUITIES; RISK assessment; INVESTMENTS
- Publication
Journal of Financial Planning, 2012, Vol 25, Issue 7, p38
- ISSN
1040-3981
- Publication type
Article