A semiparametric model for the systematic factors of portfolio credit risk premia
AbstractThe aim of this paper is to investigate the empirical relationship between daily fluctuations in the risk premium for holding a large diversified credit portfolio, which we approximate by a benchmark credit index, and some tradeable market factors which capture systematic risk. The analysis is based on an adaptive nonparametric modelling approach which allows for the data-driven estimation of the nonlinear dynamic relationship between portfolio credit risk premia and their hypothetical components. Our main finding is that the empirical weights of the systematic factors display sudden jumps during market crises and a less intense time-dependent behaviour during normal market conditions. In addition, we find that during market crises the directions of the empirical relationships are often inconsistent with ordinary economic intuition, as they are influenced by the specific circumstances of financial markets distress.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 16 (2009)
Issue (Month): 4 (September)
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Web page: http://www.elsevier.com/locate/jempfin
Credit risk Financial crises Nonstationary time series Nonparametric modelling;
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