RT Journal Article
SR Electronic
T1 Estimating the Joint Probability of Default Using Credit<br/>Default Swap and Bond Data
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 44
OP 58
DO 10.3905/jfi.2012.21.3.044
VO 21
IS 3
A1 Riccardo Pianeti
A1 Rosella Giacometti
A1 Valentina Acerbis
YR 2011
UL https://pm-research.com/content/21/3/44.abstract
AB Systemic default risk—that is, the risk of the simultaneous default of multiple institutions—has caused great concern in the recent past. The aim of this article is to estimate the joint probability of default for multiple financial institutions. Both bond and credit derivative markets convey information on the default process: The former provides information on the marginal, the latter, on the joint default probabilities. We consider the corporate bond and the credit default swap (CDS) markets. The over-the-counter nature of the CDS market implies the presence of counterparty risk, or the risk that the protection seller will fail to fulfill its obligations. The counterparty risk is reflected in the CDS price through the joint default probability of the reference entity and the protection seller. Applying a no-arbitrage argument, we extract from market data forward-looking joint default probabilities of financial institutions operating in the CDS market from January 3, 2005–Mar 15, 2010.TOPICS: Credit default swaps, fixed-income portfolio management, counterparty risk