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Systemic Credit Risk Premium: Insights from Credit Derivatives Markets

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Abstract

This study examines the market-implied premiums for bearing systemic credit risk by analyzing credit derivatives on the CDX North American Investment Grade portfolio from September 2005 to March 2021. We construct systemic credit risk premium (SCRP) as the difference between the observed prices of multi-name super-senior tranches and their synthetic counterparts valued from historical asset correlations implied by single-name CDS spreads. Our findings show that the fitted SCRP surged during the 2007-2009 financial crisis, remained stable for a period, declined gradually after 2016, and spiked again during the COVID-19 shock. The empirical analysis highlights that the estimated SCRP has significant implications for asset pricing, particularly in affecting investment opportunities for U.S. stock investors during periods of financial instability.

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  • Kiwoong Byun & Baeho Kim & Dong Hwan Oh, 2023. "Systemic Credit Risk Premium: Insights from Credit Derivatives Markets," Finance and Economics Discussion Series 2023-055r1, Board of Governors of the Federal Reserve System (U.S.), revised 04 Aug 2025.
    • Handle: RePEc:fip:fedgfe:2023-55
    DOI: 10.17016/FEDS.2023.055r1
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    Keywords

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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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