Estimating the Exposures of Major Financial Institutions to the Global Credit Risk Transfer Market: Are They Slicing the Risks or Dicing with Danger?
Jorge A. Chan-Lau
International Monetary Fund (IMF) - International Capital Markets Department; Tufts University - Fletcher School of Law and Diplomacy
International Monetary Fund (IMF)
Journal of Fixed Income, Vol. 17, No. 3, 2007
Credit risk transfer (CRT) instruments offer important diversification benefits but may magnify shocks since they disperse risk, across both financial and non-financial sectors. Exposures to CRT instruments, such as credit derivatives, are difficult to track, given the lack of public data on this activity. This paper proposes a simple method for estimating institutional exposures to credit derivatives, using readily-available and timely financial markets data. The results suggest the existence of a strong "home bias" in the exposures of institutions. Moreover, major financial institutions tend to have less risky exposures in Europe, but have riskier exposures in North America. Importantly, the findings on individual institutions appear to have been broadly borne out by revelations during the recent turmoil in global credit markets.
Keywords: Collateralized debt obligations, credit derivatives, credit risk transfer, credit default swaps, vector autoregression
JEL Classification: G11, G18, G21, G22Accepted Paper Series
Date posted: December 12, 2007
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