Template-type: ReDIF-Paper 1.0
Author-Name: Álvaro Chamizo
Author-Workplace-Name: BBVA.
Author-Name: Alfonso Novales
Author-Workplace-Name: Instituto Complutense de Análisis Económico (ICAE), and Department of Economic Analysis, Facultad de Ciencias Económicas y Empresariales, Universidad 
	Complutense, 28223 Madrid, Spain.
Title: Splitting credit risk into systemic, sectorial and idiosyncratic components
Abstract: We provide a methodology to estimate a global credit risk factor from CDS spreads that can be very useful for risk management. The global risk factor (GRF) 
	reproduces quite well the different epis- odes that have affected the credit market over the sample period. It is highly correlated with standard credit indices, but 
	it contains much higher explanatory power for fluctuations in CDS spreads across sectors than the credit indices themselves. The additional information content over 
	iTraxx seems to be related to some financial interest r ates. We first use the estimated GRF to analyze the extent to which the eleven sectors we consider are 
	systemic. After that, we use it to split the credit risk of indi- vidual issuers into systemic, sectorial, and idiosyncratic components, and we perform some analyses 
	to test that the estimated idiosyncratic components are actually firm-specific. The systemic and sec- torial components explain around 65% of credit risk in the 
	European industrial and financial firms and 50% in the North American firms in those sectors, while 35% and 50% of risk, respectively, has an idiosyncratic nature. 
	Thus, there is a significant margin for portfolio diversification. We also show that our decomposition allows us to identify those firms whose credit would be harder 
	to hedge. We end up analyzing the relationship between the estimated components of risk and some synthetic risk factors, in order to learn about the different nature 
	of the credit risk components.
Classification-JEL: C58, F34, G01, G32.
Keywords: Credit Risk; Systemic Risk; Sectorial Risk; Idiosyncratic Risk; Asset Allocation.
Length: 33 pages 
Creation-Date: 2019-09
Number: 2019-30
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae1930.txt
File-URL: https://eprints.ucm.es/id/eprint/57380/1/1930.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:1930