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Title: Credit derivatives and the default risk of large complex financial institutions
Authors: Calice, Giovanni
Ioannidis, Christos
Williams, Julian M.
Keywords: Distance to default
Credit derivatives
Credit default swap index
Issue Date: 2012
Publisher: © Springer Science+Business Media, LLC
Citation: 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.85-107
Abstract: This 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.
Description: This paper is available online at: http://dx.doi.org/10.1007/s10693-011-0121-z
Version: Accepted for publication
DOI: 10.1007/s10693-011-0121-z
URI: https://dspace.lboro.ac.uk/2134/24213
Publisher Link: http://dx.doi.org/10.1007/s10693-011-0121-z
ISSN: 0920-8550
Appears in Collections:Published Articles (Business School)

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