Interest rate shocks drive credit risk movements, impacting economic capital simulations.
The article explores how changes in interest rates affect credit risk. By analyzing credit default swap spreads and fair-value spreads, the researchers found that interest rate shocks play a significant role in determining credit risk movements across different industries and credit ratings. They also discovered that swap interest rate variables provide additional insights into credit risk beyond Treasury interest rate variables. These findings have important implications for predicting economic capital needed for managing credit portfolios.