EconPapers    
Economics at your fingertips  
 

The pricing of portfolio credit risk

Nikola Tarashev () and Zhu Haibin

No 214, BIS Working Papers from Bank for International Settlements

Abstract: Equity and credit-default-swap (CDS) markets are in disagreement as to the extent to which asset returns co-move across firms. This suggests market segmentation and casts ambiguity about the asset-return correlations underpinning observed prices of portfolio credit risk. The ambiguity could be eliminated by – currently unavailable – data that reveal the market valuation of low-probability/large-impact events. At present, judicious assumptions about this valuation can be used to reconcile observed prices with asset-return correlations implied by either equity or CDS markets. These conclusions are based on an analysis of tranche spreads of a popular CDS index, which incorporate a rather small premium for correlation risk.

Keywords: CDS index tranche; joint distribution of asset returns; correlation risk premium; copula (search for similar items in EconPapers)
JEL-codes: C15 G13 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2006-09
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.bis.org/publ/work214.pdf Full PDF document (application/pdf)
http://www.bis.org/publ/work214.htm (text/html)

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:bis:biswps:214

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler ().

 
Page updated 2024-07-14
Handle: RePEc:bis:biswps:214