Systematic and idiosyncratic default risk in synthetic credit markets

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Systematic and idiosyncratic default risk in synthetic credit markets

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Titel: Systematic and idiosyncratic default risk in synthetic credit markets
Forfatter: Feldhütter, Peter; Stenbo Nielsen, Mads
Resume: We present a new estimation approach that allows us to extract from spreads in synthetic credit markets the contribution of systematic and idiosyncratic default risk to total default risk. Using an extensive data set of 90,600 CDS and CDO tranche spreads on the North American Investment Grade CDX index we conduct an empirical analysis of an intensity-based model for correlated defaults. Our results show that systematic default risk is an explosive process with low volatility, while idiosyncratic default risk is more volatile but less explosive. Also, we nd that the model is able to capture both the level and time series dynamics of CDO tranche spreads.
URI: http://hdl.handle.net/10398/9102
Dato: 2015-01-26
Note: This is a pre-copyedited, author-produced PDF of an article accepted for publication in Journal of Financial Econometrics following peer review. The version of record Peter Feldhütter and Mads Stenbo Nielsen "Systematic and Idiosyncratic Default Risk in Synthetic Credit Markets" Journal of Financial Econometrics (Spring 2012) 10 (2): 292-324 is available online at doi: http://dx.doi.org/10.1093/jjfinec/nbr011

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