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Is Tail Risk Priced in Credit Default Swap Premia?

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  • Christian Meine
  • Hendrik Supper
  • Gregor N. F. Weiß

Abstract

We show that the propensity of a bank to experience extreme co-movements in its credit default swap (CDS) premia together with the market is priced in the bank’s default swap spread during the financial crisis. We measure a bank’s CDS tail beta by estimating the upper tail dependence between its default swap spreads and a CDS market index. Our study shows that protection sellers receive a premium for bearing the risk of extreme upward co-movements in default risk. The economic significance of this effect is large yet limited to the recent financial crisis. Banks in the upper quintile of CDS tail beta have spreads that are on average 140 basis points higher than those of banks in the lower CDS tail beta quintile.

Suggested Citation

  • Christian Meine & Hendrik Supper & Gregor N. F. Weiß, 2016. "Is Tail Risk Priced in Credit Default Swap Premia?," Review of Finance, European Finance Association, vol. 20(1), pages 287-336.
  • Handle: RePEc:oup:revfin:v:20:y:2016:i:1:p:287-336.
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    File URL: http://hdl.handle.net/10.1093/rof/rfv008
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    References listed on IDEAS

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    1. Sylvain Benoit & Gilbert Colletaz & Christophe Hurlin & Christophe Pérignon, 2013. "A Theoretical and Empirical Comparison of Systemic Risk Measures," Working Papers halshs-00746272, HAL.
    2. Schwaab, Bernd & Koopman, Siem Jan & Lucas, André, 2011. "Systemic risk diagnostics: coincident indicators and early warning signals," Working Paper Series 1327, European Central Bank.
    3. Dong Hwan Oh & Andrew J. Patton, 2013. "Time-Varying Systemic Risk: Evidence from a Dynamic Copula Model of CDS Spreads," Working Papers 13-30, Duke University, Department of Economics.
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    Cited by:

    1. repec:eee:intfor:v:33:y:2017:i:4:p:958-969 is not listed on IDEAS
    2. Polanski, Arnold & Stoja, Evarist, 2017. "Forecasting multidimensional tail risk at short and long horizons," Bank of England working papers 660, Bank of England.
    3. Benjamin Hippert & André Uhde & Sascha Tobias Wengerek, 2019. "Determinants of CDS trading on major banks," Working Papers Dissertations 51, Paderborn University, Faculty of Business Administration and Economics.
    4. repec:eee:ememar:v:34:y:2018:i:c:p:98-110 is not listed on IDEAS
    5. repec:kap:revdev:v:21:y:2018:i:1:d:10.1007_s11147-017-9134-6 is not listed on IDEAS
    6. repec:eee:ejores:v:269:y:2018:i:3:p:1137-1153 is not listed on IDEAS
    7. Mardi Dungey & John Harvey & Pierre Siklos & Vladimir Volkov, 2017. "Signed spillover effects building on historical decompositions," CAMA Working Papers 2017-52, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. repec:pal:jbkreg:v:20:y:2019:i:1:d:10.1057_s41261-018-0066-3 is not listed on IDEAS

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