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COVID-19 and credit risk: A long memory perspective

Author

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  • Yin, Jie
  • Han, Bingyan
  • Wong, Hoi Ying

Abstract

The COVID-19 pandemic shows significant impacts on credit risk, which is the key concern of corporate bond holders such as insurance companies. Credit risk, quantified by agency credit ratings and credit default swaps (CDS), usually exhibits long-range dependence (LRD) due to potential credit rating persistence. With rescaled range analysis and a novel affine forward intensity model embracing a flexible range of Hurst parameters, our studies on Moody's rating data and CDS prices reveal that default intensities have shifted from the long-range to the short-range dependence regime during the COVID-19 period, implying that the historical credit performance becomes much less relevant for credit prediction during the pandemic. This phenomenon contrasts sharply with previous financial-related crises. Specifically, both the 2008 subprime mortgage and the Eurozone crises did not experience such a great decline in the level of LRD in sovereign CDS. Our work also sheds light on the use of historical series in credit risk prediction for insurers' investment.

Suggested Citation

  • Yin, Jie & Han, Bingyan & Wong, Hoi Ying, 2022. "COVID-19 and credit risk: A long memory perspective," Insurance: Mathematics and Economics, Elsevier, vol. 104(C), pages 15-34.
    • Handle: RePEc:eee:insuma:v:104:y:2022:i:c:p:15-34
    DOI: 10.1016/j.insmatheco.2022.01.008
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    Citations

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    Cited by:

    1. Susamto, Akhmad Akbar & Octavio, Danes Quirira & Risfandy, Tastaftiyan & Wardani, Dyah Titis Kusuma, 2023. "Public ownership and local bank lending at the time of the Covid-19 pandemic: Evidence from Indonesia," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    2. Greta Falavigna & Roberto Ippoliti, 2022. "Relief Policy and the Sustainability of COVID-19 Pandemic: Empirical Evidence from the Italian Manufacturing Industry," Sustainability, MDPI, vol. 14(22), pages 1-12, November.

    More about this item

    Keywords

    COVID-19 pandemic; Credit risk; Long memory; Credit rating; Credit default swap; Financial crisis;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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