Looking Through Systemic Risk: Determinants, Stress Testing and Market Value

38 Pages Posted: 28 Sep 2016

See all articles by Alvaro Chamizo

Alvaro Chamizo

Grupo Banco Bilbao Vizcaya Argentaria (BBVA)

Alfonso Novales Cinca

Universidad Complutense de Madrid

Date Written: September 23, 2016

Abstract

We provide a methodology to estimate a global credit risk factor (GRF) from CDS spreads. The estimated factor contains higher explanatory power on CDS spread fluctuations across sectors than standard credit indices like iTraxx or CDX. We find a positive association between the GRF and implied volatility variables, and a negative association with MSCI stock market sector indices as well as with interest rates and with the slope and the curvature of the term structure. Such correlations provide useful insights for risk management and hedging of credit portfolios. Indeed, we present a factor model that can be used in a stress testing methodology of credit portfolios as well as to evaluate future credit risk scenarios. Finally, we show evidence suggesting that the GRF was priced in the market during the 2006-2015 period.

Keywords: Credit Risk, Systemic Risk, Sectorial Risk, Risk Factors, Stress Tests, Factor Models

JEL Classification: E44, F34, G01, G11, G23, G32

Suggested Citation

Chamizo, Alvaro and Novales Cinca, Alfonso, Looking Through Systemic Risk: Determinants, Stress Testing and Market Value (September 23, 2016). Available at SSRN: https://ssrn.com/abstract=2842580 or http://dx.doi.org/10.2139/ssrn.2842580

Alvaro Chamizo (Contact Author)

Grupo Banco Bilbao Vizcaya Argentaria (BBVA) ( email )

Ciudad BBVA
Ciudad BBVA. Ed. Oceania. 2º Planta
Madrid, Madrid 28050
Spain

Alfonso Novales Cinca

Universidad Complutense de Madrid ( email )

Campus of Somosaguas
Madrid
Spain

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