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Idiosyncratic and Systemic Risk in the European Corporate Sector; A CDO Perspective

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  • Yinqiu Lu
  • Jorge A Chan-Lau

Abstract

Systemic risk remains a major concern to policymakers since widespread defaults in the corporate and financial sectors could pose substantial costs to society. Forward-looking measures and/or indicators of systemic default risk are thus needed to identify potential buildups of vulnerability in advance. In this paper, we explain how to construct idiosyncratic and systemic default risk indicators using the information embedded in single-tranche standardized collateralized debt obligations (STCDOs) referencing credit derivatives indices. As an illustration, both risk indicators are constructed for the European corporate sector using midprice quotes for STCDOs referencing the iTraxx Europe index.

Suggested Citation

  • Yinqiu Lu & Jorge A Chan-Lau, 2006. "Idiosyncratic and Systemic Risk in the European Corporate Sector; A CDO Perspective," IMF Working Papers 06/107, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/107
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    References listed on IDEAS

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    1. Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
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    Cited by:

    1. Gustav A. Horn & Heike Joebges & Lothar Kamp & Alexandra Krieger & Sebastian Sick & Silke Tober, 2009. "Gesamtwirtschaftliche Stabilität durch bessere Regulierung - Vorschläge für eine Neuordnung der Finanzmärkte," IMK Report 36-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. Jorge A Chan-Lau, 2006. "Is Systematic Default Risk Priced in Equity Returns? A Cross-Sectional Analysis Using Credit Derivatives Prices," IMF Working Papers 06/148, International Monetary Fund.

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