Counterparty Risk Management with Market-Based Indicators: Lessons from the Crisis

27 Pages Posted: 18 Dec 2009 Last revised: 22 Feb 2010

See all articles by Marcelo Yoshio Takami

Marcelo Yoshio Takami

Government of the Federative Republic of Brazil - Central Bank of Brazil

Date Written: December 30, 2009

Abstract

During a financial crisis, which counterparties we would prefer not to be exposed to? This paper addresses this issue in the context of the 2007-2009 crisis by proposing three market-based measures (two are based on credit default swap spreads and the other one, on stock prices) for identifying too risky counterparties among big international financial entities. Our results show that market prices provide significant early warning signals of the fragility of distressed financial institutions and that the accuracy of the market-based indicators is much better than the traditional rating’ and is similar to market-based ratings’ provided by a rating agency. Volatility issues are addressed by means of a simple smoothing procedure.

Keywords: credit crisis, risk management, credit risk, counterparty risk, prediction, rating

JEL Classification: E58, G21

Suggested Citation

Takami, Marcelo Yoshio, Counterparty Risk Management with Market-Based Indicators: Lessons from the Crisis (December 30, 2009). Available at SSRN: https://ssrn.com/abstract=1523912 or http://dx.doi.org/10.2139/ssrn.1523912

Marcelo Yoshio Takami (Contact Author)

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

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