Analysis of Systematic Risks in Multi-Name Credit and Equity Markets

نویسندگان

  • Edmond Choi
  • Ronnie Sircar
چکیده

In this paper, we present an intensity-based common factor model that is used to analyze the valuation of common systematic risks in multi-name credit and equity markets. In particular, we use a hybrid intensity model to price single-name credit instruments such as credit default swaps (CDSs), multi-name credit derivatives such as collateralized debt obligations (CDOs), and equity index options such as calls and puts on the S&P 500. Once we have the expressions for the model prices of these instruments, we then calibrate the model parameters to fit the market data. We study two problems, the “forward” and “backward” problems: in the former, we start from equity index options and then compute the CDO tranche spreads, while in the latter, we fit the parameters to the CDO tranche spreads and then compute the equity index option prices and implied volatilities. We find that, based on our hybrid model, the systematic risks in the two markets were similar from 2004 to 2007, while the credit market incorporated far greater systematic risk than the equity market during the financial crisis from 2008 to 2010.

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تاریخ انتشار 2013