Idiosyncratic and Systemic Risk in the European Corporate Sector: A CDO Perspective

18 Pages Posted: 19 Jun 2013

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

ASEAN+3 Macroeconomic Research (AMRO); National University of Singapore (NUS) - Risk Management Institute

Yinqiu Lu

International Monetary Fund

Multiple version iconThere are 2 versions of this paper

Date Written: April 01, 2006

Abstract

Systemic risk remains a major concern to policymakers since widespread defaults in the corporate and financial sectors could pose substantial costs to society. Forward-looking measures and/or indicators of systemic default risk are thus needed to identify potential buildups of vulnerability in advance. In this paper, we explain how to construct idiosyncratic and systemic default risk indicators using the information embedded in single-tranche standardized collateralized debt obligations (STCDOs) referencing credit derivatives indices. As an illustration, both risk indicators are constructed for the European corporate sector using midprice quotes for STCDOs referencing the iTraxx Europe index.

Keywords: Systemic risk, idiosyncratic risk, credit derivatives, credit derivatives indices, collateralized debt obligations, tranches

JEL Classification: G10, G12, G15

Suggested Citation

Chan-Lau, Jorge Antonio and Lu, Yinqiu, Idiosyncratic and Systemic Risk in the European Corporate Sector: A CDO Perspective (April 01, 2006). Available at SSRN: https://ssrn.com/abstract=2281399 or http://dx.doi.org/10.2139/ssrn.2281399

Jorge Antonio Chan-Lau

ASEAN+3 Macroeconomic Research (AMRO) ( email )

10 Shenton Way #11-07/08
MAS Building
Singapore, 079117
Singapore

National University of Singapore (NUS) - Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Yinqiu Lu (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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