Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/66966
Authors: 
García, Alejandro
Prokopiw, Andrei
Year of Publication: 
2009
Series/Report no.: 
Bank of Canada Discussion Paper 2009-12
Abstract: 
Understanding the nature of credit risk has important implications for financial stability. Since authorities notably, central banks focus on risks that have systemic implications, it is crucial to develop ways to measure these risks. The difficulty lies in finding reliable measures of aggregate credit risk in the economy, as opposed to firmlevel credit risk. In this paper, the authors examine two models recently developed for this purpose: a reduced-form model applied to credit default swap index tranches, and a structural model applied to the spread on U.S. corporate bond indexes. The authors find that these models provide information on the nature of credit events that is, whether the event is systemic or not and on the type of risk priced in corporate bonds (i.e., credit or liquidity risk). However, although the two models provide potentially useful information for policy-makers, at this stage it is difficult to corroborate the accuracy of the information obtained from them. Further work is needed before authorities can include conclusions drawn from the two models into their policy decisions.
Subjects: 
Credit and credit aggregates
Financial markets
Financial stability
JEL: 
G10
G12
G13
Document Type: 
Working Paper
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