Journal of Risk

Risk.net

The structure of credit risk: spread volatility and ratings transitions

Rudiger Kiesel, William Perraudin, Alex P. Taylor

ABSTRACT

Ratings-based models are widely used by firms making their own capital decisions and by policy-makers designing regulatory capital requirements. By ignoring fluctuations in spreads for given rating categories, the current generation of ratings-based models leaves out a potentially important dimension of risk. This article extends standard ratings-based credit risk models to include spread risk. The main complication in incorporating spread risk is to infer a suitable joint distribution for spread changes over the long horizons that are typically used in portfolio credit risk calculations. Using our generalized credit risk framework, we provide a systematic quantification of different dimensions of credit risk. The key result is that spread fluctuations contribute most of the of risk for higher-rated credits.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: