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Sectoral credit risk in the euro area
This article outlines a method to compute market-based corporate default risk indicators at sectoral level and evaluates systemic and idiosyncratic determinants of default risk. This approach takes into account observed and unobserved common factors and the presence of different degrees of cross-section dependence in the form of economic proximity. The results contribute to the financial stability literature with a contingent claims approach to a sector-based analysis with a less dominant macro focus while being compatible with existing stress-testing methodologies in the literature. A disaggregated analysis of the different corporate and financial sectors allows for a more detailed assessment of specificities in terms of sectoral risk profile, i.e. heterogeneity of business models, risk exposures and interaction with the rest of the macro environment.