Updated: 06/10/2009 12:09
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| Credit Default Swap Spreads and U.S. Financial Market: Investigating Some Dependence Structure ACCEPTED FOR PUBLICATION AS "INVESTIGATING THE DEPENDENCE STRUCTURE BETWEEN CREDIT DEFAULT SWAP SPREADS AND THE U.S. FINANCIAL MARKET" | |
 Revised Abstract:
Under Basel II framework, credit risk assessment is of high significance in the light of correlation risk. Correlation risk is often envisioned along with business conditions and financial market's impact. We employ copula methodology to identify the dependence structures that may exist between market risk fundamentals and credit risk fundamentals. Considering credit derivative spreads as credit risk fundamentals and market data as market risk determinants, we describe and quantify the asymmetric link prevailing between credit risk and market risk. Credit risk is negatively linked with market price risk whereas it becomes positively linked with market volatility risk. Such patterns give rise to interesting asymmetric dependence structures between both risk sources. We are then able to balance reliably market price risk with market volatility feedback, the market trend supporting a common correlation between securities. In the light of the previous trade-off, we propose also a simple credit Risk management
rule.
Authors:
Hayette GATFAOUI
JEL classification:
C16 C32 D81
Keywords:
Archimedean copulas, concordance measures, credit risk, market risk, Risk management
,tail dependence
Download locations
AFBC 2007 (former draft) FORTHCOMING IN ANNALS OF FINANCE
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=992569
Annals of Finance Publication (Revised paper)
http://www.springerlink.com/content/e33188236272492l/?p=b2df22f60c084a9287f8afbfb7c86a6c&pi=0
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