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An Empirical Analysis of Equity Default Swaps (II): Multivariate Insights


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  • Norbert_Jobst

    (Standard & Poor's)

  • Arnaud_de_Servigny


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    Equity default swaps (EDS) - contracts that trigger a payment when the underlying equity price falls below a predetermined level - have attracted much attention recently because of their similarities to credit default swaps (CDS) on the one hand, and American digital puts on the other. Particular interest has been received by Collateral- ized debt obligations (CDOs) referencing a portfolio of EDSs, which not only requires the univariate assessment of the risks inherent in EDSs, but also the analysis of dependencies between EDSs (and other asset classes). In this paper, we specifically address correlation or dependency aspects of EDSs, by applying techniques developed for estimating default correlation. Based on Standard & Poor’s CreditPro and Compustat (North America) databases, extensive empirical research is presented. Amongst the main findings are that EDS correlations for standard strikes/barriers of 30% are significantly higher than default correlations, and increase in barrier level, but only for strikes above 50%. This indicates a barrier dependent correlation concept.

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    Bibliographic Info

    Paper provided by EconWPA in its series Finance with number 0503025.

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    Length: 25 pages
    Date of creation: 28 Mar 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpfi:0503025

    Note: Type of Document - pdf; pages: 25
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    Keywords: EDS Equity Default Swap Correlation;

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
    2. Arnaud_de_Servigny & Norbert_Jobst, 2005. "An Empirical Analysis of Equity Default Swaps (I): Univariate Insights," International Finance, EconWPA 0503007, EconWPA.
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    Cited by:
    1. Arnaud_de_Servigny & Norbert_Jobst, 2005. "An Empirical Analysis of Equity Default Swaps (I): Univariate Insights," International Finance, EconWPA 0503007, EconWPA.
    2. Peter Grundke, 2008. "Regulatory treatment of the double default effect under the New Basel Accord: how conservative is it?," Review of Managerial Science, Springer, vol. 2(1), pages 37-59, March.


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