Credit Risk

MacroVar monitors credit risk by monitoring credit default swap indices in the United States, Europe and Asia. Credit Risk is one of the components of MacroVar

Risk Management model. Learn more about how MacroVar risk management model monitors credit risk.

Credit Risk Model

Credit risk is the likelihood that a company or a government goes bankrupt and the amount the investor loses if it happens. Credit-risky securities include corporate debt securities like corporate bonds and bank loans and sovereign debt. Credit default swaps are widely used derivatives used in credit risk management to describe market perceptions of credit risk for a specific government or corporation. Credit default swaps (CDS) are derivatives contracts which by construction aim at quantifying the risk of default of a counterparty. Therefore, CDS written major financial institutions or corporations are early signals to monitor and detect elevated credit risk conditions in the global financial system.

MacroVar calculates for each of the six credit default swap indices tracked the five year z-score. Extreme values of z-scores greater than two indicate elevated credit risk conditions and vice-versa. MacroVar credit risk index is the average of z-scores of the six indices tracked.

MacroVar monitors the following credit default swaps indexes to capture the level of credit risk in the United States and European markets:

• CDX North America Investment Grade: CDX North America Investment Grade is a credit default swap index used to track credit risk of investment grade (low risk) corporations in North America
• CDX North America High Yield: CDX North America High Yield is a credit default swap index used to track credit risk in high yield (high risk) corporations in North America.
• ITRAXX Europe Main: ITRAXX Europe Main is an index tracking credit default swaps of European companies with investment grade credit ratings published by Markit.
• ITRAXX Europe Crossover: ITRAXX Europe Crossover is an index tracking credit default swaps of the 75 most liquid sub-investment grade corporations.
• ITRAXX Senior Financials: ITRAXX Europe Senior Financials is an index tracking credit default swaps of the 25 largest financial entities.
• ITRAXX Financials Subordinated: ITRAXX Europe Subordinated Financials is an index tracking credit default swaps of the 25 financials from the ITRAXX Europe Index.