Tracking systematic default risk

Tracking systematic default risk

Systematic default risk is the probability of a critical share of the corporate sector defaulting simultaneously. It can be analyzed through a corporate default model that accounts for both firm-level and communal macro shocks. Point-in-time estimation of such a risk metric requires accounting data and market returns. Systematic default risk arises from the capital structure’s vulnerability and firms’ recent performance, as reflected in equity prices.

The metric is both an indicator and predictor of macroeconomic conditions, particularly financial distress. Also, systematic default risk has helped forecast medium-term equity and lower-grade bond returns. This predictive power seems to arise mostly from the price of risk. When systematic default risk is high, investors require greater compensation for taking on exposure to corporate finances.

View the full post here on Macrosynergy Research.

Luca Bagato

Adjunct Professor of Globalized Financial Mkts and of Financial Microstructure and Liquidity Analysis@Unicatt

11mo

Happy New Year Ralph and tks for sharing it…default risk correlation expectation is a driver for risk premia skyrocketing uptrend …

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Frank Smietana

Head of Content & Insights | State Street Alpha

11mo

Thanks Ralph Sueppel for sharing your insights.

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