A Semiparametric Model for the Systematic Factors of Portfolio Credit Risk Premia

28 Pages Posted: 21 Nov 2015 Last revised: 22 Nov 2015

See all articles by Flavia Giammarino

Flavia Giammarino

Independent Researcher

Pauline M. Barrieu

London School of Economics & Political Science (LSE)

Date Written: November 26, 2008

Abstract

The aim of this paper is to investigate the empirical relationship between daily fluctuations in the risk premium for holding a large diversified credit portfolio, which we approximate by a benchmark credit index, and some tradeable market factors which capture systematic risk. The analysis is based on an adaptive nonparametric modelling approach which allows for the data-driven estimation of the nonlinear dynamic relationship between portfolio credit risk premia and their hypothetical components. Our main finding is that the empirical weights of the systematic factors display sudden jumps during market crises and a less intense time-dependent behaviour during normal market conditions. In addition, we find that during market crises the directions of the empirical relationships are often inconsistent with ordinary economic intuition, as they are influenced by the specific circumstances of financial markets distress.

Keywords: Credit risk, Financial crises, Nonstationary time-series, Nonparametric modelling

JEL Classification: G01, G10, G14, C14, C22

Suggested Citation

Giammarino, Flavia and Barrieu, Pauline M., A Semiparametric Model for the Systematic Factors of Portfolio Credit Risk Premia (November 26, 2008). Journal of Empirical Finance, Vol. 16, No. 4, 2009, Available at SSRN: https://ssrn.com/abstract=2693496

Flavia Giammarino (Contact Author)

Independent Researcher

Pauline M. Barrieu

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://stats.lse.ac.uk/barrieu/

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