1. Yaw-Huei Wang National Central University
Discussion for Liao and Chen (2006): A Cash Flow Based Corporate Credit Portfolio Analysis
Yaw-Huei Wang
National Central University

2. Summary
Motivation:
Most existing literature are reduced from models and focus on dealing with the default correlations between assets.
The dynamics of risk structure and the estimation of the recovery rates are not paid much attention.

3. Summary Objectives Results To propose a model in which
Firms’ asset value distributions are generated using a state-dependent free cash flow process,
Loss distributions are obtained by employing the conditional default approaches.
Results
A 15-asset example shows that the approach has satisfactory performance in credit rating and tranching and pricing of a CBO.

4. Comments and Questions
The underlying premise of this paper is very interesting.
An elegant alternative to the credit portfolio analysis.
A well organized and written paper.

5. Comments and Questions
Compared with previous models, is the proposed approach any better? A horse race may be appreciated.
Component analysis v.s. factor models?
Macroeconomic and firm specific factors
How to interpret the factors (actually components)?
Since conditional distributions are independent, why copula?
Some diagnostic tests are appreciated