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A value at risk analysis of credit default swaps

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  • Scheicher, Martin
  • Raunig, Burkhard

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.

Suggested Citation

  • Scheicher, Martin & Raunig, Burkhard, 2008. "A value at risk analysis of credit default swaps," Discussion Paper Series 2: Banking and Financial Studies 2008,12, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp2:7322
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    References listed on IDEAS

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    Cited by:

    1. Aldasoro, Iñaki & Barth, Andreas, 2017. "Syndicated loans and CDS positioning," ESRB Working Paper Series 58, European Systemic Risk Board.

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    More about this item

    Keywords

    Credit default swap; Value at Risk; Capital structure arbitrage;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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