Credit Risk Transfer and Contagion∗
نویسندگان
چکیده
Some have argued that recent increases in credit risk transfer are desirable because they improve the diversification of risk. Others have suggested that they may be undesirable if they increase the risk of financial crises. Using a model with banking and insurance sectors, we show that credit risk transfer can be beneficial when banks face uniform demand for liquidity. However, when they face idiosyncratic liquidity risk and hedge this risk in an interbank market, credit risk transfer can be detrimental to welfare. It can lead to contagion between the two sectors and increase the risk of crises.
منابع مشابه
Analysis of the Contagion Effect to the Credit Derivative Valuation
This study explores a credit derivative pricing model with counterparty risk and the contagion effect. To compare with the standard credit derivative pricing model, we analyze the counterparty risk and the contagion effect to a kthto-default Basket Credit Linked Note (BCLN) valuation by Monte Carlo simulation. Counterparty risk and the contagion effect show significant influence for kth-to-defa...
متن کاملEstimating Credit Contagion in a Standard Factor Model
State-of-the-art credit risk portfolio models and the New Basel Capital Accord consider only symmetric dependencies between borrowers in a portfolio, such as correlations. Recently, asymmetric dependencies have been introduced by Davis/Lo (2001) among others. However, statistical estimation techniques and empirical evidence on contagion is still rather scarce. The present paper provides a simpl...
متن کاملDerivatives and Credit Contagion in Interconnected Networks
The importance of adequately modeling credit risk has once again been highlighted in the recent financial crisis. Defaults tend to cluster around times of economic stress due to poor macro-economic conditions, but also by directly triggering each other through contagion. Although credit default swaps have radically altered the dynamics of contagion for more than a decade, models quantifying the...
متن کاملContagion and Excess Correlation in Credit Default Swaps
This paper documents an increase in the correlation of credit default swap (CDS) spread changes during the credit crisis and investigates the source of that increase. One possible explanation is that correlations increased because fundamental values became more correlated during the crisis. Alternatively, correlations may have increased because of contagion, rather than because of an increase i...
متن کاملContagion models with interacting default intensity processes
Credit risk is quantified by the loss distribution due to unexpected changes in the credit quality of the counterparty in a financial contract. Default correlation risk refers to the risk that a bundle of risky obligors may default together. To understand the clustering phenomena in correlated defaults, we consider credit contagion models which describe the propagation of financial distress fro...
متن کامل