LAUSR

We provide a methodology to estimate a global credit risk factor (GRF) from CDS spreads. The estimated factor contains higher explanatory power on CDS spread fluctuations across sectors than standard credit indices like iTraxx or CDX. We find a positive association between the GRF and implied volatility variables, and a negative association with MSCI stock market sector indices as well as with interest rates and with the slope and the curvature of the term structure. Such correlations provide useful insights for risk management and hedging of credit portfolios. Indeed, we present a factor model that can be used in a stress testing methodology of credit portfolios as well as to evaluate future credit risk scenarios. Finally, we show evidence suggesting that the GRF was priced in the market during the 2006-2015 period.