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Credit risk
About: Credit risk is a research topic. Over the lifetime, 18595 publications have been published within this topic receiving 382866 citations.
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TL;DR: Pan et al. as discussed by the authors explored the nature of default arrival and recovery implicit in the term structures of sovereign CDS spreads, and showed that a single-factor model with λ Q following a lognormal process captures most of the variation in the terms of spreads.
Abstract: This paper explores the nature of default arrival and recovery implicit in the term structures of sovereign CDS spreads. We argue that term structures of spreads reveal not only the arrival rates of credit events (λ Q ), but also the loss rates given credit events. Applying our framework to Mexico, Turkey, and Korea, we show that a single-factor model with λ Q following a lognormal process captures most of the variation in the term structures of spreads. The risk premiums associated with unpredictable variation in λ Q are found to be economically significant and co-vary importantly with several economic measures of global event risk, financial market volatility, and macroeconomic policy. THE BURGEONING MARKET FOR SOVEREIGN CREDIT DEFAULT SWAPS (CDS) contracts offers a nearly unique window for viewing investors’ risk-neutral probabilities of major credit events impinging on sovereign issuers, and their risk-neutral losses of principal in the event of a restructuring or repudiation of external debts. In contrast to many “emerging market” sovereign bonds, sovereign CDS contracts are designed without complex guarantees or embedded options. Trading activity in the CDS contracts of several sovereign issuers has developed to the point that they are more liquid than many of the underlying bonds. Moreover, in contrast to the corporate CDS market, where trading has been concentrated largely in the 5-year maturity contract, CDS contracts at several maturity points between 1 and 10 years have been actively traded for several years. As such, a full term structure of CDS spreads is available for inferring default and recovery information from market data. This paper explores in depth the time-series properties of the risk-neutral mean arrival rates of credit events (λ Q ) implicit in the term structure of sovereign CDS spreads. Applying our framework to Mexico, Turkey, and Korea, three countries with different geopolitical characteristics and credit ratings, we ∗ Pan is with the MIT Sloan School of Management and NBER. Singleton is with the Graduate
903 citations
TL;DR: In this article, the authors analyse the behavior of credit default swaps (CDS) for a sample of firms and find support for the theoretical equivalence of CDS prices and credit spreads.
Abstract: We analyse the behaviour of credit default swaps (CDS) for a sample of firms and find support for the theoretical equivalence of CDS prices and credit spreads. When this is violated we suggest the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. We show that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short-run. Both markets equally reflect these factors in the long-run, and this is primarily brought about by bond market adjustment.
879 citations
TL;DR: This article found that when borrowers have private information about risk, the lowest-risk borrowers tend to pledge collateral, whereas when risk is observable, the highest risk borrowers tend not to pledge.
878 citations
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TL;DR: The authors study the nature of sovereign credit risk using an extensive sample of CDS spreads for 26 developed and emerging-market countries and find that the excess returns from investing in sovereign credit are largely compensation for bearing global risk and that there is little or no country-specific credit risk premium.
Abstract: We study the nature of sovereign credit risk using an extensive sample of CDS spreads for 26 developed and emerging-market countries. Sovereign credit spreads are surprisingly highly correlated, with just three principal components accounting for more than 50 percent of their variation. Sovereign credit spreads are generally more related to the U.S. stock and high-yield bond markets, global risk premia, and capital flows than they are to their own local economic measures. We find that the excess returns from investing in sovereign credit are largely compensation for bearing global risk, and that there is little or no country-specific credit risk premium. A significant amount of the variation in sovereign credit returns can be forecast using U.S. equity, volatility, and bond market risk premia.
876 citations
TL;DR: In this paper, the determinants of problem loans of Spanish commercial and savings banks in the period 1985-1997 were compared, taking into account both macroeconomic and individual bank level variables.
Abstract: Although credit risk is an important factor that financial institutions must cope with, the determinants of bank problem loans have been little studied. Using panel data, we compare the determinants of problem loans of Spanish commercial and savings banks in the period 1985–1997, taking into account both macroeconomic and individual bank level variables. The GDP growth rate, firms, and family indebtedness, rapid past credit or branch expansion, inefficiency, portfolio composition, size, net interest margin, capital ratio, and market power are variables that explain credit risk. However, there are significant differences between commercial and savings banks, which confirm the relevance of the institutional form in the management of credit risk. Our findings raise important bank supervisory policy issues: the use of bank level variables as early warning indicators, the advantages of bank mergers from different regions, and the role of banking competition and ownership in determining credit risk.
830 citations