Measuring Credit Spread Risk
AbstractIt is widely known that the small but looming possibility of defaultrenders the expected return distribution for financial productscontaining credit risk to be highly skewed and fat tailed. In thispaper we apply recent techniques developed for incorporating theadditional risk faced by changes in swap spreads. Using data from theUS, UK, Germany, and Japan, we find that the risk faced from largespread widenings and tightenings is grossly underestimated. Estimationof swap spread risk is dramatically improved when the severity of thefat tails is measured and incorporated into current estimationtechniques.
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Bibliographic InfoPaper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2002-95-F&A.
Date of creation: 22 Oct 2002
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value-at-risk; Market Risk; backtesting; extreme Value theory; parametric distributions;
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