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New index better predicts corporate credit risk

16 July 2012

Prof Duan sharing about the Corporate Vulnerability Index

The NUS Risk Management Institute (RMI) launched on 12 July the Corporate Vulnerability Index (CVI), a new suite of indices that are indicators of credit risk. Devised as part of the RMI Credit Research Initiative, the first-of-its-kind index by a university offers free access to credit risk ratings of North America, Europe, Asia and S&P500 firms.

The CVI is meant to reflect a new dimension of risk that has not been previously captured in other indices, said Professor Duan Jin-Chuan, Director of RMI and Cycle & Carriage Professor of Finance at NUS, during his presentation at the sixth annual Risk Management Conference.

It is constructed using RMI's probability of default of individual firms. A new computation of risk is obtained via the three types of indices: value-weighted index by market capitalisation; equally-weighted index to represent all firms equally; and tail index which takes the highest 5th percentile of probability of default in a group to measure the most vulnerable companies.

Prof Duan said that as the CVI conveys information that is different from existing indices, it acts as a good crisis barometer to predict the corporate default rate. In addition, derivative products on CVI can be good hedging tools for financial crises.

The RMI Credit Research Initiative is a non-profit alternative to ratings on listed firms around the world in response to the criticisms leveled against commercial credit rating agencies. Constantly evolving, it is open to selective input from researchers globally. Updated on a daily basis by RMI researchers, the RMI rating model covers more than 28,000 active firms spanning 44 economies in Asia, North America, Latin America and Europe. A complete world coverage is expected at the end of this year.

The two-day Risk Management Conference with the theme "Risk Management Responses to Rising Systematic and Systemic Risk" brought together some 300 participants from academia, industry and government. It was hosted by RMI, which focuses on the study of financial risk management, and supported by the Monetary Authority of Singapore under its programme on Risk Management and Financial Innovation.