The pricing of portfolio credit risk
AbstractEquity and credit-default-swap (CDS) markets are in disagreement as to the extent to which asset returns co-move across firms. This suggests market segmentation and casts ambiguity about the asset-return correlations underpinning observed prices of portfolio credit risk. The ambiguity could be eliminated by – currently unavailable – data that reveal the market valuation of low-probability/large-impact events. At present, judicious assumptions about this valuation can be used to reconcile observed prices with asset-return correlations implied by either equity or CDS markets. These conclusions are based on an analysis of tranche spreads of a popular CDS index, which incorporate a rather small premium for correlation risk.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 214.
Length: 39 pages
Date of creation: Sep 2006
Date of revision:
CDS index tranche; joint distribution of asset returns; correlation risk premium; copula;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-18 (All new papers)
- NEP-FMK-2007-06-18 (Financial Markets)
- NEP-RMG-2007-06-18 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John F. Geweke & Michael P. Keane, 1997. "Mixture of normals probit models," Staff Report 237, Federal Reserve Bank of Minneapolis.
- repec:dgr:uvatin:2005060 is not listed on IDEAS
- Sanjiv R. Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2007.
"Common Failings: How Corporate Defaults Are Correlated,"
Journal of Finance,
American Finance Association, vol. 62(1), pages 93-117, 02.
- Sanjiv Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2006. "Common Failings: How Corporate Defaults are Correlated," NBER Working Papers 11961, National Bureau of Economic Research, Inc.
- Daniel Covitz & Song Han, 2004. "An empirical analysis of bond recovery rates: exploring a structural view of default," Finance and Economics Discussion Series 2005-10, Board of Governors of the Federal Reserve System (U.S.).
- Xin Huang & Hao Zhou & Haibin Zhu, 2009.
"A Framework for Assessing the Systemic Risk of Major Financial Institutions,"
BIS Working Papers
281, Bank for International Settlements.
- Huang, Xin & Zhou, Hao & Zhu, Haibin, 2009. "A framework for assessing the systemic risk of major financial institutions," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2036-2049, November.
- Xin Huang & Hao Zhou & Haibin Zhu, 2009. "A framework for assessing the systemic risk of major financial institutions," Finance and Economics Discussion Series 2009-37, Board of Governors of the Federal Reserve System (U.S.).
- Huang, Xin & Zhou, Hao & Zhu, Haibin, 2012.
"Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis,"
Journal of Financial Stability,
Elsevier, vol. 8(3), pages 193-205.
- Xin Huang & Hao Zhou & Haibin Zhu, 2009. "Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis," Finance and Economics Discussion Series 2009-44, Board of Governors of the Federal Reserve System (U.S.).
- Xin Huang & Hao Zhou & Haibin Zhu, 2010. "Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis," BIS Working Papers 296, Bank for International Settlements.
- Palombini, Edgardo, 2009. "Factor models and the credit risk of a loan portfolio," MPRA Paper 20107, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa).
If references are entirely missing, you can add them using this form.