Multifactor models and the construction of factor-matching portfolios are by now pervasive in investment management. In textbook discussions, the construction of factor-tracking portfolios is presented as a simple exercise solved using well-known optimization methods such as linear programming....

The Duffie--Lando (DL) credit risk model is based on the structural model developed by Leland and Toft, but modifies it by adding a noise term to the observation of firm value. This is done to reflect the fact that the asset process cannot be observed directly and thus that default times are...