Description: Abstract: A model for analyzing the probability and severity of default of sovereign entities and banks. The methodology analyzes the risks inherent in the investment of debt of sovereign governments and large financial institutions side-by-side, taking into consideration macroeconomic interactions among the sovereign fiscal and monetary authorities, the financial institutions, and the real economy. The signature aspect of the methodology is that it adapts a Merton-style default model to use explicit measures of sovereign assets and asset volatility.

Description: Real estate and infrastructure as asset classes have traditionally been an essential part of many diversified institutional portfolios, and legitimate candidates for the type of risk analysis typically required for other assets that are publicly traded. These illiquid asset classes have been labeled diversifiers and inflation hedges, and touted as providing idiosyncratic alpha opportunities and enhanced portfolio yield at moderate risk. Their sheer physicality, unlike other financial products which seem to disintegrate, default, or flee to some secretive banking regime in times of crisis, somehow conveys a sense of security to their owners. Unfortunately, this naïve perception has little to do with realty with respect to their actual yield, return generating capability, and risk characteristics. The rigorous quantification of the risk/reward tradeoff for real estate and infrastructure has been a problem that has never found a clear a nswer with either investors or academics. It is the intent of this paper to directly address this problem in a detailed, bottom-up fashion that satisfies both fundamental “brick-and-mortar” traditionalists as well as provide a rigorous quantitative approach that allows private equity real estate’s and infrastructure’s full integration into a best practices multi-asset risk model.

Description: Abstract: A model for analyzing the probability and severity of default of sovereign entities and banks. The methodology analyzes the risks inherent in the investment of debt of sovereign governments and large financial institutions side-by-side, taking into consideration macroeconomic interactions among the sovereign fiscal and monetary authorities, the financial institutions, and the real economy. The signature aspect of the methodology is that it adapts a Merton-style default model to use explicit measures of sovereign assets and asset volatility.