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Implied correlations of iTraxx tranches during the financial crisis

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Listed author(s):
  • Heidorn, Thomas
  • Kahlert, Dennis

Abstract

Implied Base Correlations of Single-tranche CDOs on standardized Credit Indices such as the iTraxx Europe have been used in the credit derivatives market for price communication. During the financial crisis, implied correlations have been quite volatile indicating the growing fraction of systematic credit risk of STCDOs. This paper analyses the determinants of tranche implied base correlations for the period September 2006 until April 2009. It will be shown that realized asset correlations between iTraxx Europe corporates are not able to explain the extreme movements of tranche implied correlations during the financial crisis. Additionally, it will be seen that the worsening creditworthiness of market participants in the interbank market as well as growing pressure on their refinancing conditions correlated significantly with the development of implied base correlations of iTraxx tranches.

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Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 145.

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Date of creation: 2010
Handle: RePEc:zbw:fsfmwp:145
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Keywords: Implied Correlation; Asset Correlation; Systematic Credit Risk; Market Liquidity; Funding Liquity;

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  1. Herrmann-Pillath, Carsten, 2009. "Kulturelle Hybridisierung und Wirtschaftstransformation in China," Frankfurt School - Working Paper Series 115, Frankfurt School of Finance and Management.
  2. Herrmann-Pillath, Carsten, 2008. "Neuroeconomics, naturalism and language," Frankfurt School - Working Paper Series 108, Frankfurt School of Finance and Management.
  3. Herrmann-Pillath, Carsten, 2010. "Entropy, function and evolution: naturalizing Peircian semiosis," Frankfurt School - Working Paper Series 134, Frankfurt School of Finance and Management.
  4. Demidova-Menzel, Nadeshda & Heidorn, Thomas, 2007. "Gold in the investment portfolio," Frankfurt School - Working Paper Series 87, Frankfurt School of Finance and Management.
  5. Schalast, Christoph & Tiemann, Marcel & Tuppi, Pascal, 2009. "Staatsfonds - neue Akteure an den Finanzmärkten?," Frankfurt School - Working Paper Series 114, Frankfurt School of Finance and Management.
  6. Heidorn, Thomas & Kaiser, Dieter G. & Roder, Christoph, 2009. "Empirische Analyse der Drawdowns von Dach-Hedgefonds," Frankfurt School - Working Paper Series 109, Frankfurt School of Finance and Management.
  7. Schanz, Kay-Michael & Richard, Jörg & Schalast, Christoph, 2004. "Unternehmen im Prime Standard staying public oder going private? Nutzenanalyse der Börsennotiz," Frankfurt School - Working Paper Series 60, Frankfurt School of Finance and Management.
  8. Hirsch, Christian & Bannier, Christina E., 2007. "The economics of rating watchlists: Evidence from rating changes," CFS Working Paper Series 2008/02, Center for Financial Studies (CFS).
  9. Heidorn, Thomas & Siragusano, Tindaro, 2004. "Die Anwendbarkeit der Behavioral Finance im Devisenmarkt," Frankfurt School - Working Paper Series 52, Frankfurt School of Finance and Management.
  10. Herrmann-Pillath, Carsten & Libman, Alexander & Xiaofan, Yu, 2010. "State and market integration in China: A spatial econometrics approach to 'local protectionism'," Frankfurt School - Working Paper Series 137, Frankfurt School of Finance and Management.
  11. C. Herrmann-Pillath., 2011. "A Neurolinguistic Approach to Performativity in Economics," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 2.
  12. Schalast, Christoph & Stralkowski, Ingo, 2008. "10 Jahre deutsche Buyouts," Frankfurt School - Working Paper Series 89, Frankfurt School of Finance and Management.
  13. Bannier, Christina E. & Grote, Michael H., 2008. "Equity gap? - Which equity gap? On the financing structure of Germany's Mittelstand," Frankfurt School - Working Paper Series 106, Frankfurt School of Finance and Management.
  14. Herrmann-Pillath, Carsten, 2008. "The naturalistic turn in economics: implications for the theory of finance," Frankfurt School - Working Paper Series 105, Frankfurt School of Finance and Management.
  15. Christina E. Bannier & Patrick Behr & Andre Güttler, 2010. "Rating opaque borrowers: why are unsolicited ratings lower?," Review of Finance, European Finance Association, vol. 14(2), pages 263-294.
  16. Hankir, Yassin & Rauch, Christian & Umber, Marc P., 2009. "It's the market power, stupid! Stock return patterns in international bank M&A," Frankfurt School - Working Paper Series 129, Frankfurt School of Finance and Management.
  17. Heidorn, Thomas & Gerhold, Mirko, 2004. "Investitionen und Emissionen von Convertible Bonds (Wandelanleihen)," Frankfurt School - Working Paper Series 50, Frankfurt School of Finance and Management.
  18. Christina E. Bannier, 2010. "Is there a Holdup Benefit in Heterogeneous Multiple Bank Financing?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(4), pages 641-661, December.
  19. Christina Bannier, 2007. "Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotiation incidences?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(4), pages 445-470, December.
  20. Anders, Dietmar & Binder, Andreas & Hesdahl, Ralf & Schalast, Christoph & Thöne, Thomas, 2004. "Aktuelle Fragen des Bank- und Kapitalmarktrechts I: Non-Performing-Loans/Faule Kredite - Handel, Work-Out, Outsourcing und Securitisation," Frankfurt School - Working Paper Series 54, Frankfurt School of Finance and Management.
  21. Libman, Alexander, 2010. "Constitutions, regulations, and taxes: Contradictions of different aspects of decentralization," Journal of Comparative Economics, Elsevier, vol. 38(4), pages 395-418, December.
  22. Heidorn, Thomas & Meyer, Bernd & Pietrowiak, Alexander, 2004. "Performance-Effekte nach Directors' Dealings in Deutschland, Italien und den Niederlanden," Frankfurt School - Working Paper Series 57, Frankfurt School of Finance and Management.
  23. Roßbach, Peter, 2009. "Die Rolle des Internets als Informationsbeschaffungsmedium in Banken," Frankfurt School - Working Paper Series 120, Frankfurt School of Finance and Management.
  24. Wollersheim, Jutta & Barthel, Erich, 2008. "Kulturunterschiede bei Mergers & Acquisitions: Entwicklung eines Konzeptes zur Durchführung einer Cultural Due Diligence," Frankfurt School - Working Paper Series 94, Frankfurt School of Finance and Management.
  25. Schanz, Kay-Michael & Schalast, Christoph, 2006. "Wertpapierprospekte: Markteinführungspublizität nach EU-Prospektverordnung und Wertpapierprospektgesetz 2005," Frankfurt School - Working Paper Series 74, Frankfurt School of Finance and Management.
  26. Dickler, Robert A. & Schalast, Christoph, 2006. "Distressed debt in Germany: What's next? Possible innovative exit strategies," Frankfurt School - Working Paper Series 73, Frankfurt School of Finance and Management.
  27. Chevalier, Pierre & Heidorn, Thomas & Krieger, Christian, 2003. "Temperaturderivate zur strategischen Absicherung von Beschaffungs- und Absatzrisiken," Frankfurt School - Working Paper Series 49, Frankfurt School of Finance and Management.
  28. Bannier, Christina E. & Hänsel, Dennis N., 2007. "Determinants of banks' engagement in loan securitization," Frankfurt School - Working Paper Series 85, Frankfurt School of Finance and Management.
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Cited by:

  1. Herrmann-Pillath, Carsten, 2010. "Rethinking evolution, entropy and economics: A triadic conceptual framework for the maximum entropy principle as applied to the growth of knowledge," Frankfurt School - Working Paper Series 146, Frankfurt School of Finance and Management.
  2. Umber, Marc P. & Grote, Michael H. & Frey, Rainer, 2010. "Europe integrates less than you think: Evidence from the market for corporate control in Europe and the US," Frankfurt School - Working Paper Series 150, Frankfurt School of Finance and Management.
  3. Yu, Xiaofan, 2011. "A spatial interpretation of the persistency of China's provincial inequality," Frankfurt School - Working Paper Series 171, Frankfurt School of Finance and Management.
  4. Kostka, Genia & Zhou, Jianghua, 2010. "Chinese firms entering China's low-income market: Gaining competitive advantage by partnering governments," Frankfurt School - Working Paper Series 147, Frankfurt School of Finance and Management.
  5. Hui, Cho-Hoi & Lo, Chi-Fai & Lau, Chun-Sing, 2013. "Option-implied correlation between iTraxx Europe Financials and Non-Financials Indexes: A measure of spillover effect in European debt crisis," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3694-3703.

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