Credit risk control and management using limited diversification

Wu, Dexiang; Wu, Desheng Dash

doi:10.1080/13669877.2018.1485173

Cited by 4 publications

(3 citation statements)

References 35 publications

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“…Alan Greenspan, the 13th Chair of the Federal Reserve of the United States (US), has previously stated that CDS are efficient vehicles for credit risk transfer (Greenspan, 2004). CDS were designed by a US bank 'JP Morgan Inc.' in 1997, initially, with a total notional amount of US $180 billion to swap the credit risk exposure from one party to another and became important alternatives for hedging uncertainties (Klieber, 2012;Wu & Dash Wu, 2018). BISTRO (Broad Index Secured Trust Offerings), a synthetic product similar to collateralized loan obligation (CLO) composed in three tranches, was the initial name given to CDS (Ünvan, 2020) and was first marketed by JP Morgan.…”

Section: Introductionmentioning

confidence: 99%

Why do banks use credit default swaps (CDS)? A systematic review

Tabassum

Yameen

2023

Journal of Economic Surveys

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Credit default swaps (CDS)—the fiercely discussed derivatives instrument since the explosion of the recent global credit crunch—are still subject to considerable theoretical and practical debate. More than a decade after significant developments in CDS literature, we currently lack a holistic understanding of the disparate strands of evidence, synthesizing analytical advancements in the field. We, therefore, conducted a systematic review of 143 publications (peer‐reviewed and first‐tier grey literature), focusing on three key areas: CDS characteristics and development, credit risk hedging, and determinants of CDS use, and performed the first bibliometric mapping for CDS. Our review makes the following contributions. First, measuring CDS characteristics and development gives a snapshot of how CDS remained a significant indicator for hedging corporate lending risk. Second, by mapping the research landscape, we provide insights into banks’ use of CDS; in particular, we show that banks use CDS to obtain capital relief, enhance liquidity and profitability, limit credit supply, and consequently mitigate their NPLs’ level. Moreover, the use of CDS by lenders increases firms’ leverage and value. Leaving a fertile area for debates and future research, the outcomes of this review help provide policy guidance to regulators and financial institutions that make informed decisions to use CDS as a credit risk management instrument.

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Section: Introductionmentioning

confidence: 99%

Why do banks use credit default swaps (CDS)? A systematic review

Tabassum

Yameen

2023

Journal of Economic Surveys

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“…, 2007). Credit default swaps (CDSs) are one of the most prominent types of credit derivatives, having been founded by a US bank “J P Morgan” in 1997 with a total notional outstanding of US$180bn (Wu and Dash Wu, 2021; Augustin et al. , 2014).…”

Section: Introductionmentioning

confidence: 99%

Credit default swaps (CDSs): an effective tool to manage credit risk of Indian banks

Tabassum

Yameen

2022

JMB

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PurposeCredit default swaps (CDSs) are among the most widely used credit derivatives since their innovation and designed to hedge the credit risk of reference entities. They were exposed after the global financial crisis of 2007–08, and were blamed for its occurrence. This paper aims to describe the fundamental mechanism of CDSs, demonstrating how a CDSs contract works. Further, this study explores the growth of the global and Indian CDS market by taking a holistic perspective.Design/methodology/approachAn objective-driven descriptive research design is adopted to achieve a rigorous and accurate analysis of the study. Therefore, research papers from high-impact journals have been carefully reviewed to achieve the aim of the study.FindingsThe study shows that CDSs are still in their infancy in India. Banks are the primary market makers and users in the Indian CDSs market; therefore, regulatory authorities must assist them to boost the market. For banks to become more confident, they should gain experience and knowledge from other active CDSs markets around the world.Originality/valueThis study attempts to provide insights into the current state of the global as well as the Indian CDS market. Further, this study suggests approaches for the Indian banking sector to play an active role in the Indian CDSs market.

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“…However, the reader interested in recent references can consider the work of Saardchom (2018), which consists in an actuarial model dealing with the aggregate loss distribution. The paper of Wu and Wu (2018), which puts forward the interest of partially diversifying a portfolio of credit default swaps, is equally interesting. See the work of Kurtz et al (2018), as well, which deals with sectorial concentration, or the paper of Konstantinov (2017), which deals with factorial concentration.…”

Section: Introductionmentioning

confidence: 99%

On the Diversification of Fixed Income Assets

Courtois

2022

Risks

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This article introduces a new approach for dealing with the diversification/concentration risk of fixed income assets. Because Government bonds, corporate bonds, and mortgage backed securities constitute a large proportion of the assets of institutional investors in most countries, it is important to be able to determine the number of lines/issuers of such assets, not only for portfolio management but also for risk management purposes. The approach that I introduce shows the dependence of the critical number of lines of fixed income assets on the main interest rate risk and credit risk drivers. Specifically, I examine the importance of volatility risk, force of mean reversion, default risk, recovery risk, and default dependence risk on the critical number of assets in a fixed income portfolio. The methodology in this paper relies on the use of the coefficient of variation for the computation of the critical number of credit-sensitive securities in a fixed income portfolio. To the best of my knowledge, this paper is the first to develop such an approach.

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Credit risk control and management using limited diversification

Cited by 4 publications

References 35 publications

Why do banks use credit default swaps (CDS)? A systematic review

Why do banks use credit default swaps (CDS)? A systematic review

Credit default swaps (CDSs): an effective tool to manage credit risk of Indian banks

On the Diversification of Fixed Income Assets

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