Empirical Analysis of Credit Risk Regime Switching and Temporal Conditional Default Correlation in Credit Default Swap Valuation: The Market liquidity effect

In this paper, we extend the debate concerning Credit Default Swap valuation to include time varying correlation and co-variances. Traditional multi-variate techniques treat the correlations between covariates as constant over time; however, this view is not supported by the data. Secondly, since financial data does not follow a normal distribution because of its heavy tails, modeling the data using a Generalized Linear model (GLM) incorporating copulas emerge as a more robust technique over traditional approaches. This paper also includes an empirical analysis of the regime switching dynamics of credit risk in the presence of liquidity by following the general practice of assuming that credit and market risk follow a Markov process. The study was based on Credit Default Swap data obtained from Bloomberg that spanned the period January 1st 2004 to August 08th 2006. The empirical examination of the regime switching tendencies provided quantitative support to the anecdotal view that liquidity decreases as credit quality deteriorates. The analysis also examined the joint probability distribution of the credit risk determinants across credit quality through the use of a copula function which disaggregates the behavior embedded in the marginal gamma distributions, so as to isolate the level of dependence which is captured in the copula function. The results suggest that the time varying joint correlation matrix performed far superior as compared to the constant correlation matrix; the centerpiece of linear regression models.

Analysis of Synthetic Diamond Wafer Interferograms Using a Parallelized Simulated Annealing Algorithm

Diamonds are known for both their beauty and their durability. Jefferson National Lab in Newport News, VA has found a way to utilize the diamond's strength to view the beauty of the inside of the atomic nucleus with the hopes of finding exotic forms of matter. By firing very fast electrons at a diamond sheet no thicker than a human hair, high energy particles of light known as photons are produced with a high degree of polarization that can illuminate the constituents of the nucleus known as quarks. The University of Connecticut Nuclear Physics group has responsibility for crafting these extremely thin, high quality diamond wafers. These wafers must be cut from larger stones that are about the size of a human finger, and then carefully machined down to the final thickness. The thinning of these diamonds is extremely challenging, as the diamond's greatest strength also becomes its greatest weakness. The Connecticut Nuclear Physics group has developed a novel technique to assist industrial partners in assessing the quality of the final machining steps, using a technique based on laser interferometry. The images of the diamond surface produced by the interferometer encode the thickness and shape of the diamond surface in a complex way that requires detailed analysis to extract. We have developed a novel software application to analyze these images based on the method of simulated annealing. Being able to image the surface of these diamonds without requiring costly X-ray diffraction measurements allows rapid feedback to the industrial partners as they refine their thinning techniques. Thus, by utilizing a material found to be beautiful by many, the beauty of nature can be brought more clearly into view.