The Great Recession has shaken the foundations of the financial industry and led to tighter solvency monitoring of both the banking and insurance industries. To this end, we develop a portfolio credit risk model that includes firm-specific Markov-switching regimes as well as individual stochastic and endogenous recovery rates. Using weekly credit default swap premiums for 35 financial firms, we analyze the credit risk of each of these companies and their statistical linkages, placing special emphasis on the 2005-2012 period. Moreover, we study the systemic risk affecting both the banking and insurance subsectors.
Published October 2015 , 41 pages