Finance and Economics Discussion Series (FEDS)
August 2023 (Revised August 2025)
Systemic Credit Risk Premium: Insights from Credit Derivatives Markets
Kiwoong Byun, Baeho Kim, and Dong Hwan Oh
Abstract:
This study examines the market-implied premiums for bearing systemic credit risk by analyzing credit derivatives on the CDX North American Investment Grade portfolio from September 2005 to March 2021. We construct systemic credit risk premium (SCRP) as the difference between the observed prices of multi-name super-senior tranches and their synthetic counterparts valued from historical asset correlations implied by single-name CDS spreads. Our findings show that the fitted SCRP surged during the 2007-2009 financial crisis, remained stable for a period, declined gradually after 2016, and spiked again during the COVID-19 shock. The empirical analysis highlights that the estimated SCRP has significant implications for asset pricing, particularly in affecting investment opportunities for U.S. stock investors during periods of financial instability.
Keywords: Credit Default Swap (CDS), CDS Index (CDX), Reference Tranche Rate, Systemic Credit Risk Premium
DOI: https://doi.org/10.17016/FEDS.2023.055r1
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Original Paper: PDF | Accessible materials (.zip)
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