Systematic Credit Risk: CDX Index Correlation and Extreme Dependence
Résumé
Dependence is an important issue in credit risk portfolio modeling and pricing. We discuss a straightforward common factor model of credit risk dependence, which is motivated by intensity models such as Duffie and
Singleton (1998), among others. In the empirical analysis, we study dependence under the risk-neutral measure using credit default swap (CDS) spread data of liquid large-cap U.S. obligors. The proxy for the common
factor is the DJ CDX.NA.IG index. We document that (i) the CDX factor is significant but has low explanatory power, (ii) factor sensitivities show distinct time-varying nature and that (iii) systematic credit risk shows
asymmetric extreme factor dependence, where extreme dependence is present for upward CDX movements only. This finding from an EVT-copula approach is what is predicted by various intensity models of joint defaults.
Singleton (1998), among others. In the empirical analysis, we study dependence under the risk-neutral measure using credit default swap (CDS) spread data of liquid large-cap U.S. obligors. The proxy for the common
factor is the DJ CDX.NA.IG index. We document that (i) the CDX factor is significant but has low explanatory power, (ii) factor sensitivities show distinct time-varying nature and that (iii) systematic credit risk shows
asymmetric extreme factor dependence, where extreme dependence is present for upward CDX movements only. This finding from an EVT-copula approach is what is predicted by various intensity models of joint defaults.
Domaines
Economies et finances
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