scholarly journals The Effect of Systematic Default Risk on Credit Risk Premiums

2019 ◽  
Vol 11 (21) ◽  
pp. 6039
Author(s):  
Kim
Keyword(s):  
Credit Risk ◽  
Cross Section ◽  
Default Risk ◽  
Credit Default Swap ◽  
Credit Market ◽  
Testable Hypothesis ◽  
Risk Premiums ◽  
Positive Effects ◽  
Market Factors ◽  
Default Risks

This study examines whether systematic default risks affect a cross section of credit risk premiums. Using a structural framework, I derive a theoretical cross-sectional relationship, develop a testable hypothesis, and provide a method to estimate the systematic default risk. The empirical results of US corporate credit default swap data are consistent with my hypothesis. The findings show that, while credit market factors have positive effects on a cross section of credit risk premiums, stock market factors have a negative impact. Regression analyses reveal that the market’s average default probability and the value factor have a significant effect on the credit risk premium. In addition, credit market factors are more influential than equity market factors as systematic default risk factors. The results suggest that systematic and idiosyncratic default risks are priced differently in a cross section of credit risk premiums.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

Liquidity and Arbitrage in the Market for Credit Risk

2011 ◽  
Vol 46 (3) ◽  
pp. 627-656 ◽  
Author(s):  
Amrut Nashikkar ◽  
Marti G. Subrahmanyam ◽  
Sriketan Mahanti
Keyword(s):  
Credit Risk ◽  
Weighted Average ◽  
Credit Default Swap ◽  
Market Liquidity ◽  
Bond Markets ◽  
Credit Crisis ◽  
Limits To Arbitrage ◽  
Positive Effects ◽  
Bond Yield ◽  
Credit Default

AbstractThe recent credit crisis has highlighted the importance of market liquidity and its interaction with the price of credit risk. We investigate this interaction by relating the liquidity of corporate bonds to the basis between the credit default swap (CDS) spread of the issuer and the par-equivalent bond yield spread. The liquidity of a bond is measured using a recently developed measure called latent liquidity, which is defined as the weighted average turnover of funds holding the bond, where the weights are their fractional holdings of the bond. We find that bonds with higher latent liquidity are more expensive relative to their CDS contracts after controlling for other realized measures of liquidity. Analysis of interaction effects shows that highly illiquid bonds of firms with a greater degree of uncertainty are also expensive, consistent with limits to arbitrage between CDS and bond markets, due to the higher costs of “shorting” illiquid bonds. Additionally, we document the positive effects of liquidity in the CDS market on the CDS-bond basis. We also find that several firm- and bond-level variables related to credit risk affect the basis, indicating that the CDS spread does not fully capture the credit risk of the bond.

scholarly journals Procyclicality in tradeable credit risk: Consequences for South Africa

2018 ◽  
Vol 21 (1) ◽  
Author(s):  
Dirk Visser ◽  
Gary W. Van Vuuren
Keyword(s):  
Credit Risk ◽  
South African ◽  
Default Risk ◽  
Value At Risk ◽  
Credit Default Swap ◽  
Credit Crisis ◽  
The South ◽  
Risk Capital ◽  
Risk Aggregation ◽  
Credit Default

Background: Tradeable credit assets are vulnerable to two varieties of credit risk: default risk (which manifests itself as a binary outcome) and spread risk (which arises as spreads change continuously). Current (2017) regulatory credit risk rules require banks to hold capital for both these risks. Aggregating these capital amounts is non-trivial. Aim: The aim was to implement the bubble value at risk (buVaR) approach, proposed by Wong (2011) to overcome the risk aggregation problem. This method accounts for diversification and for procyclicality and operates by inflating the positive side of the underlying return distribution, in direct proportion to prevailing credit spread levels (usually liquid credit default swap spreads). Setting: The principal setting for the study was the South African credit market which represents a developing market. Previous work by Wong (2011) focussed only on developed markets. Methods: Using South African data, closed form solutions were derived for free parameters of Wong’s formulation, and the relationship between the spread level and the response function was developed and calibrated. Results: The results indicate that the original calibrations and assumptions made by Wong (2011) would result in excessive capital requirement for South African banks. Estimates obtained from this work suggest further calibration is required to cover the unique features of the South African milieu. Considerable differences compared with other markets were also found. Conclusion: The application of buVaR to South African government bond credit default swaps spreads highlighted the metric’s countercyclical properties that would potentially have countered bubble developments had they been implemented during the credit crisis of 2008/2009. Regulatory authorities should take this important metric into account when allocating South African bank’s credit risk capital.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

What Drives Systemic State Credit Risk? Evidence from the State Credit Default Swap (CDS) Market

2019 ◽  
Vol 28 (4) ◽  
pp. 5-45
Author(s):  
Sheen Liu ◽  
Chunchi Wu ◽  
Chung-Ying Yeh ◽  
Woongsun Yoo
Keyword(s):  
Credit Risk ◽  
Credit Default Swap ◽  
The State ◽  
Credit Default ◽  
Default Swap
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