Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework
The current expected loss calculations have recently attracted considerable attention in the research on credit risk modeling, impairment provisioning, and financial networks’ stability. A new CDS-based approach to estimate current expected credit loss is proposed for low default portfolios, contain...
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| Format: | Article |
| Language: | English |
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Wiley
2019-01-01
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| Series: | Complexity |
| Online Access: | http://dx.doi.org/10.1155/2019/7820618 |
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| author | Mariya Gubareva |
| author_facet | Mariya Gubareva |
| author_sort | Mariya Gubareva |
| collection | DOAJ |
| description | The current expected loss calculations have recently attracted considerable attention in the research on credit risk modeling, impairment provisioning, and financial networks’ stability. A new CDS-based approach to estimate current expected credit loss is proposed for low default portfolios, containing credit exposures to corporate issuers covered by publicly traded CDS contracts. First, a fraction of CDS spread related to a pure default compensation for different CDS maturities is assessed. Our results contrast with previous research. Second, based on the obtained historical weights of the default risk premium, a forward-looking term structure of the probabilities of default implied by the current CDS quotes is derived. The proposed approach covers both investment and noninvestment grade debt. The resulting framework is applied to a sample of corporate bonds. The developed methodology provides a useful tool, on one hand, for credit risk managers and balance-sheet preparers and, on the other hand, for regulators of financial markets as it sheds light on how procyclicality could be avoided in provisions. |
| format | Article |
| id | doaj-art-341f74f22cd34b4cb726b5e2e6a46756 |
| institution | Kabale University |
| issn | 1076-2787 1099-0526 |
| language | English |
| publishDate | 2019-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Complexity |
| spelling | doaj-art-341f74f22cd34b4cb726b5e2e6a467562025-02-03T05:53:49ZengWileyComplexity1076-27871099-05262019-01-01201910.1155/2019/78206187820618Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning FrameworkMariya Gubareva0ISCAL–Lisbon Accounting and Business School, Instituto Politécnico de Lisboa, Av. Miguel Bombarda, 20, 1069-035 Lisbon, PortugalThe current expected loss calculations have recently attracted considerable attention in the research on credit risk modeling, impairment provisioning, and financial networks’ stability. A new CDS-based approach to estimate current expected credit loss is proposed for low default portfolios, containing credit exposures to corporate issuers covered by publicly traded CDS contracts. First, a fraction of CDS spread related to a pure default compensation for different CDS maturities is assessed. Our results contrast with previous research. Second, based on the obtained historical weights of the default risk premium, a forward-looking term structure of the probabilities of default implied by the current CDS quotes is derived. The proposed approach covers both investment and noninvestment grade debt. The resulting framework is applied to a sample of corporate bonds. The developed methodology provides a useful tool, on one hand, for credit risk managers and balance-sheet preparers and, on the other hand, for regulators of financial markets as it sheds light on how procyclicality could be avoided in provisions.http://dx.doi.org/10.1155/2019/7820618 |
| spellingShingle | Mariya Gubareva Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework Complexity |
| title | Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework |
| title_full | Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework |
| title_fullStr | Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework |
| title_full_unstemmed | Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework |
| title_short | Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework |
| title_sort | weight of the default component of cds spreads avoiding procyclicality in credit loss provisioning framework |
| url | http://dx.doi.org/10.1155/2019/7820618 |
| work_keys_str_mv | AT mariyagubareva weightofthedefaultcomponentofcdsspreadsavoidingprocyclicalityincreditlossprovisioningframework |