We present an intuitive model of systemic risk to analyse the complex interdependencies between different borrowers. We characterise systemic risk by the way that financial institutions are interconnected. Using their probability of default, we classify different international financial institutions into five rating groups. Then we use the state-of-the-art canonical (C-) and D-vine copulae to investigate the partial correlation structure between the rating groups. Amongst many interesting findings, we discover that the second tier financial institutions pay a larger contribution to the systemic risk than the top tier borrowers. Further, we discuss an application of our methodology for pricing credit derivative swaps.
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