Manuscript_CDS_LCFIs_2011.pdf (303.61 kB)
Credit derivatives and the default risk of large complex financial institutions
journal contribution
posted on 2017-02-24, 09:51 authored by Giovanni Calice, Christos Ioannidis, Julian M. WilliamsThis paper proposes and implements a multivariate model of the coevolution of the first and second moments of two broad credit default swap indices and the equity prices of sixteen large complex financial institutions. We use this empirical model to build a bank default risk model, in the vein of the classic Merton-type, which utilises a multi-equation framework to model forward-looking measures of market and credit risk using the credit default swap (CDS) index market as a measure of the conditions of the global credit environment. In the first step, we estimate the dynamic correlations and volatilities describing the evolution of the CDS indices and the banks’ equity prices and then impute the implied assets and their volatilities conditional on the evolution and volatility of equity. In the second step, we show that there is a substantial ‘asset shortfall’ and that substantial capital injections and/or asset insurance are required to restore the stability of our sample institutions to an acceptable level following large shocks to the aggregate level of credit risk in financial markets.
History
School
- Business and Economics
Department
- Business
Published in
Journal of Financial Services ResearchVolume
42Issue
1-2Pages
85 - 107Citation
CALICE, G., IOANNIDIS, C. and WILLIAMS, J.M., 2012. Credit derivatives and the default risk of large complex financial institutions. Journal of Financial Services Research, 42 (1-2), pp.85-107Publisher
© Springer Science+Business Media, LLCVersion
- AM (Accepted Manuscript)
Publisher statement
This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/Acceptance date
2011-09-01Publication date
2012Notes
This paper is available online at: http://dx.doi.org/10.1007/s10693-011-0121-zISSN
0920-8550eISSN
1573-0735Publisher version
Language
- en