Conditional and joint credit risk

Bernd Schwaab, Andre Lucas and Xin Zhang

No 1621, Working Paper Series from European Central Bank

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

Keywords: Financial Stability; higher order moments; sovereign credit risk; time-varying parameters (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-ban and nep-rmg
Note: 955417
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1621.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20131621

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().