Systemic Credit Risk: What is the Market Telling Us?

Posted: 23 Sep 2008

See all articles by Vineer Bhansali

Vineer Bhansali

LongTail Alpha, LLC

Robert Gingrich

affiliation not provided to SSRN

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Date Written: September, 23 2008

Abstract

The ongoing subprime crisis raises many concerns about the possibility of even more widespread credit shocks. We describe a simple linear version of a sophisticated model that can be used to extract information about macroeconomic credit risk from the prices of tranches of liquid credit indices. The market appears to price three types of credit risk: idiosyncratic risk at the level of individual companies, sectorwide risk at the level of companies within an industry, and economywide or systemic risk. We applied the model to the recent behavior of tranches in the U.S. and European credit derivatives markets and show that the current crisis has more than twice the systemic risk of the automotive-downgrade credit crisis of May 2005.

Keywords: Derivative Instruments, Debt Derivatives, Debt Investments, Risk Measures, Credit Analysis

Suggested Citation

Bhansali, Vineer and Gingrich, Robert and Longstaff, Francis A., Systemic Credit Risk: What is the Market Telling Us? (September, 23 2008). Financial Analysts Journal, Vol. 64, No. 4, 2008. Available at SSRN: https://ssrn.com/abstract=1272494

Vineer Bhansali (Contact Author)

LongTail Alpha, LLC ( email )

500 Newport Center Drive
Suite 820
Newport Beach, CA 92660
United States

Robert Gingrich

affiliation not provided to SSRN ( email )

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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