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A value at risk analysis of credit default swaps

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  • Scheicher, Martin
  • Raunig, Burkhard
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    Abstract

    We study the risk of holding credit default swaps (CDS) in the trading book. In particular, we compare the Value at Risk (VaR) of a CDS position to the VaR for investing in the respective firm's equity. Our sample consists of CDS – stock price pairs for 86 actively traded firms over the period from March 2003 to October 2006. We find that the VaR for a stock is usually far larger than the VaR for a position in the same firm's CDS. However, the distance between CDS VaR and equity VaR is markedly smaller for firms with high credit risk. The distance also declines for longer holding periods. We also observe a positive correlation between CDS and equity VaR. -- Kreditderivate wie Credit Default Swaps (CDS) haben in den letzten Jahren den Handel mit Kreditrisiko signifikant vereinfacht. Ein standardisiertes Kontrakt-Design, niedrige Transaktionskosten und eine große and heterogene Gruppe von Marktteilnehmern haben dazu beigetragen, dass CDS die Benchmark - Funktion für die Preisbestimmung im Markt für Unternehmens-Verschuldung erreichen. Heute ist der CDS das am meisten gehandelte Kreditderivat. Wir analysieren das Risiko von CDS, die im Handelsbuch gehalten werden. Wir vergleichen den Value at Risk (VaR) der CDS Position mit dem VaR für eine Position in der Aktie der gleichen Firma. Unsere Stichprobe umfasst CDS ? Aktien Paare für 86 aktiv gehandelte Firmen im Zeitraum von März 2003 bis Oktober 2006. Wir finden, dass der VaR der Aktie meistens den VaR der CDS - Position deutlich übersteigt. Die Distanz zwischen dem CDS - VaR und dem Aktien - VaR ist jedoch bei Firmen mit hohem Kreditrisiko deutlich geringer. Die Distanz sinkt auch bei längeren Haltedauern. Wir beobachten weiter eine positive Korrelation zwischen dem CDS - VaR und dem Aktien - VaR.

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2008,12.

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    Date of creation: 2008
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    Handle: RePEc:zbw:bubdp2:7322

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    Keywords: Credit default swap; Value at Risk; Capital structure arbitrage;

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    1. Haibin Zhu & Benjamin Yibin Zhang & Hao Zhou, 2005. "Explaining credit default swap spreads with equity volatility and jump risks of individual firms," BIS Working Papers 181, Bank for International Settlements.
    2. Jan Ericsson & Kris Jacobs & Rodolfo A. Oviedo, 2004. "The Determinants of Credit Default Swap Premia," CIRANO Working Papers, CIRANO 2004s-55, CIRANO.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 449-70, May.
    4. Joshua V. Rosenberg & Til Schuermann, 2004. "A general approach to integrated risk management with skewed, fat-tailed risks," Staff Reports, Federal Reserve Bank of New York 185, Federal Reserve Bank of New York.
    5. Jing-zhi Huang & Hao Zhou, 2008. "Specification analysis of structural credit risk models," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2008-55, Board of Governors of the Federal Reserve System (U.S.).
    6. Kwan, Simon H., 1996. "Firm-specific information and the correlation between individual stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 40(1), pages 63-80, January.
    7. Acharya, Viral V. & Johnson, Timothy C., 2007. "Insider trading in credit derivatives," Journal of Financial Economics, Elsevier, Elsevier, vol. 84(1), pages 110-141, April.
    8. Matthew Pritsker, 2001. "The hidden dangers of historical simulation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-27, Board of Governors of the Federal Reserve System (U.S.).
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