Credit risk

About: Credit risk is a research topic. Over the lifetime, 18595 publications have been published within this topic receiving 382866 citations.

Market Conditions, Default Risk and Credit Spreads

Abstract: This study empirically examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, we find that average credit spreads decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. At the market level, investor sentiment is the most important determinant of credit spreads. At the firm level, credit spreads generally rise with cash flow volatility and beta, with the effect of cash flow beta varying with market conditions. We identify implied volatility as the most significant determinant of default risk among firm-level characteristics. Overall, a major portion of individual credit spreads is accounted for by firm-level determinants of default risk, while macroeconomic variables are directly responsible for a lesser portion.

Innovations in credit risk transfer : implications for financial stability

Abstract: Banks and other lenders often transfer credit risk in order to liberate capital for further loan intermediation. Beyond selling loans outright, lenders are increasingly active in the markets for syndicated loans, collateralized loan obligations (CLOs), credit default swaps, credit derivative product companies, “specialty finance companies,” and other financial innovations designed for credit risk transfer. My purpose here is to explore the design, prevalence, and effectiveness of credit risk transfer. My focus will be the costs and benefits for the

Pricing Credit-Sensitive Debt When Interest Rates, Credit Ratings and Credit Spreads are Stochastic

Abstract: This paper develops a model for the pricing of credit-sensitive debt contracts. Over the past two decades, the debt markets have seen a proliferation of contracts designed to reapportion interest rate and credit risks between issuer and investors. Contracts including credit-sensitive notes (CSNs), spread adjusted notes (SPANs), and floating rate notes (FRNs) adjust investors' exposures to three risks: interest rate risk, changes in credit risk caused by changes in the credit rating of the issuer of the debt, and changes in credit risk caused by changes in spreads on the debt, even when ratings have not changed. In the paper, we develop a pricing model incorporating all three risks, with special emphasis on credit risks. The model incorporates a decomposition of credit spreads into two stochastic elements: the default process and the recovery process in the event of default. The model is easily implementable as it uses observable inputs. By using a discrete time formulation the model is numerically easy to employ, and also permits the pricing of debt with embedded options of American type. It also allows for pricing contracts between parties with varying credit ratings such as swaps where each counterparty may have different credit quality. These features impart a degree of generality and practicality to the model which should make it attractive to academics and practitioners alike.