Systemic Credit Risk Premium: Insights from Credit Derivatives Markets

Kiwoong Byun (), Baeho Kim () and Dong Hwan Oh
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Dong Hwan Oh: https://www.federalreserve.gov/econres/dong-hwan-oh.htm

No 2023-055r1, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This study examines the market-implied premiums for bearing systemic credit risk by analyzing credit derivatives on the CDX North American Investment Grade portfolio from September 2005 to March 2021. We construct systemic credit risk premium (SCRP) as the difference between the observed prices of multi-name super-senior tranches and their synthetic counterparts valued from historical asset correlations implied by single-name CDS spreads. Our findings show that the fitted SCRP surged during the 2007-2009 financial crisis, remained stable for a period, declined gradually after 2016, and spiked again during the COVID-19 shock. The empirical analysis highlights that the estimated SCRP has significant implications for asset pricing, particularly in affecting investment opportunities for U.S. stock investors during periods of financial instability.

Keywords: Credit Default Swap (CDS); CDS Index (CDX); Reference Tranche Rate; Systemic Credit Risk Premium (search for similar items in EconPapers)
JEL-codes: C63 G01 G12 G17 (search for similar items in EconPapers)
Pages: 46 p.
Date: 2023-08-18, Revised 2025-08-04
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2023-55

DOI: 10.17016/FEDS.2023.055r1

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