Credit spread shocks: how big and how often?

A central question in managing the mark-to-market risk of a credit trading book is ascribing probabilities to big spread moves or, equivalently, finding mark-to-market value-at-risk at high confidence levels. It is worth winding the clock back to early July 2007 (fortunately one has such luxuries when writing articles) to get an idea of what different models say, or said, about such events.

Suppose, for added realism, that you are the quant responsible for managing desk risk, and the head trader

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