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They are correlated because they share a common factor, namely expectations of future economic growth. Using the framework of a discounted cash flow valuation approach; the higher cash flows resulting from higher expected growth, more than compensates for the increase in the discount rate, hence a positive correlation. Periods of high inflation or ...

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This is a good question. There are various views to this. I will share some thoughts: Higher interest rates mean lower bond prices for bonds already emmitted. Investors switchting between bonds and stocks could sell bonds and buy stocks in times of rising yields (fearing that his developement will last) which increases demand for stocks Why do interest ...

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I believe that your problem can be formulated as: Find PD matrix that is as close as possible to a given PD matrix (result of some previous calibration, or the matrix computed using average hazard rate, or any other "target", or the penalty on non-smoothness) subject to the following constraints: The values that are given must be matched exactly ...

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The typical approach is to try to fit a ratings migration matrix to available rating transition data. If default rates are all you have then that's going to be difficult. Instead, I might try to fit a separate reduced form credit model on survival probability $P_\ell$ for each rating $\ell$ by fitting the function  P_\ell(T) = \exp\left( -\int_0^T h(t) ...

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I worked for a company where we had a similar problem with a volatility surface. I tried applying LOESS to it, but it didn't work. The final result has to conform to some obvious monotonicity restrictions and if that is not built into the smoothing method there will always be some odd points in the end. Another problem is that smoothing typically allows the ...

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There are quite a few reasons: Fed funds futures rate and Eurodollar futures rate do not reflect market expectations alone. Technically speaking, a risk-free interest rate is the sum of 1) rate expectations, 2) term premium, and 3) convexity bias. Term premium is typically positive, since investors demand a higher yield for taking on more duration risk ...

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