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Conditional and joint credit risk

Author

Listed:
  • Schwaab, Bernd
  • Lucas, André
  • Zhang, Xin
Abstract
We propose an empirical framework to assess joint and conditional probabilities of credit events from CDS prices observed in the market. Our model is based on a dynamic skewed-t distribution that captures many salient features of CDS data, including skewed and heavy-tailed changes in the price of CDS protection, as well as dynamic volatilities and correlations that ensure that uncertainty and risk dependence can increase in times of stress. We apply the framework to euro area sovereign CDS spreads during the euro area debt crisis. Our results reveal significant time-variation in distress dependence and spill-over effects. We investigate in particular market perceptions of joint and conditional risks around announcements of Eurosystem non-standard monetary policy measures, and document strong reductions in joint risk. JEL Classification: C32, G32

Suggested Citation

  • Schwaab, Bernd & Lucas, André & Zhang, Xin, 2013. "Conditional and joint credit risk," Working Paper Series 1621, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20131621
    Note: 955417
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1621.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Marcel Fratzscher & Malte Rieth, 2019. "Monetary Policy, Bank Bailouts and the Sovereign-Bank Risk Nexus in the Euro Area," Review of Finance, European Finance Association, vol. 23(4), pages 745-775.
    2. Andreeva, Desislava & Vlassopoulos, Thomas, 2016. "Home bias in bank sovereign bond purchases and the bank-sovereign nexus," Working Paper Series 1977, European Central Bank.

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    More about this item

    Keywords

    Financial Stability; higher order moments; sovereign credit risk; time-varying parameters;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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