Idiosyncratic and Systemic Risk in the European Corporate Sector: A CDO Perspective
April 1, 2006
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Summary
Systemic risk remains a major concern to policymakers since widespread defaults in the corporate and financial sectors could pose substantial costs to society. Forward-looking measures and/or indicators of systemic default risk are thus needed to identify potential buildups of vulnerability in advance. In this paper, we explain how to construct idiosyncratic and systemic default risk indicators using the information embedded in single-tranche standardized collateralized debt obligations (STCDOs) referencing credit derivatives indices. As an illustration, both risk indicators are constructed for the European corporate sector using midprice quotes for STCDOs referencing the iTraxx Europe index.
Subject: CDOs, Credit, Currencies, Stocks, Systemic risk
Keywords: credit derivative, equity tranche, investor, portfolio, tranche, WP
Pages:
18
Volume:
2006
DOI:
Issue:
107
Series:
Working Paper No. 2006/107
Stock No:
WPIEA2006107
ISBN:
9781451863673
ISSN:
1018-5941
