Systemic Risk, Financial Crisis, and Credit Risk Insurance

26 Pages Posted: 6 Jul 2013

See all articles by Fang Chen

Fang Chen

University of New Haven

Xuanjuan Chen

Shanghai University of Finance and Economics

Zhenzhen Sun

University of Massachusetts Dartmouth; University of Massachusetts Dartmouth

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Ming Zhong

Shanghai University of Finance and Economics

Date Written: August 2013

Abstract

Differing from conventional insurance firms whose underwriting business does not contribute to systemic risk, credit risk insurance companies providing credit protections for debt obligations are exposed to systemic risk. We show that credit risk insurers (CRIs) underperformed conventional insurance companies during the 2007–2009 financial crisis, and such underperformance is attributed to the greater systemic risk of CRIs. We also find that the credit spreads of insured bonds increase significantly after their insurers are downgraded or put in the negative watch list. We control for alternative factors affecting bond credit spreads and the result is robust.

Keywords: systemic risk, credit risk insurers, financial crisis

JEL Classification: G01, G12, G22

Suggested Citation

Chen, Fang and Chen, Xuanjuan and Sun, Zhenzhen and Yu, Tong and Zhong, Ming, Systemic Risk, Financial Crisis, and Credit Risk Insurance (August 2013). Financial Review, Vol. 48, Issue 3, pp. 417-442, 2013, Available at SSRN: https://ssrn.com/abstract=2290446 or http://dx.doi.org/10.1111/fire.12009

Fang Chen

University of New Haven

300 Orange Avenue
West Haven, CT 06516
United States

Xuanjuan Chen

Shanghai University of Finance and Economics

Zhenzhen Sun

University of Massachusetts Dartmouth ( email )

285 Old Westport Road
Dartmouth, MA 02747-2300
United States

University of Massachusetts Dartmouth ( email )

285 Old Westport Road
N Dartmouth, MA 02747-2300
United States

Tong Yu

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

Ming Zhong

Shanghai University of Finance and Economics

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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