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Credit Risk Decomposition for Asset Allocation

Author

Listed:
  • Chamizo Cana, Álvaro

    (BBVA)

  • Novales Cinca, Alfonso

    (Universidad Complutense)

Abstract

We provide a methodology for credit risk analysis that can be embedded into a risk appetite framework. We analyze the information content in CDS spreads to estimate the systematic and idiosyncratic components of credit risk for CDS issuers in the industrial sector of Europe. Such decomposition should be an important tool for the evaluation of the diversiication possibilities of credit portfolios or for the design of appropriate hedging strategies. It could be used by financial institutions to maintain their risk limits when taking their asset allocation decisions as well as by supervisors investigating potential systematic risk problems. The analysis could be extended to other sectors.

Suggested Citation

  • Chamizo Cana, Álvaro & Novales Cinca, Alfonso, 2016. "Credit Risk Decomposition for Asset Allocation," Journal of Financial Transformation, Capco Institute, vol. 43, pages 117-123.
    • Handle: RePEc:ris:jofitr:1565
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    Citations

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    Cited by:

    1. Chamizo, Álvaro & Novales, Alfonso, 2021. "Evaluation of market risk associated with hedging a credit derivative portfolio," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 411-430.
    2. Álvaro Chamizo & Alexandre Fonollosa & Alfonso Novales, 2019. "Forward-looking asset correlations in the estimation of economic capital," Documentos de Trabajo del ICAE 2019-25, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    3. Chamizo, Álvaro & Fonollosa, Alexandre & Novales, Alfonso, 2019. "Forward-looking asset correlations in the estimation of economic capital," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 264-288.

    More about this item

    Keywords

    Credit Risk; Systemic Risk; Sectorial Risk; Idiosyncratic Risk; Asset Allocation;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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