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Tail Return Analysis of Bear Stearns Credit Default Swaps

Author

Listed:
  • Liuling Li

    (Nankai University)

  • Bruce Mizrach

    (Rutgers University)

Abstract

We compare several models for Bear Stearns' credit default swap spreads estimated via a Markov chain Monte Carlo algorithm. The Bayes Factor selects a CKLS model with GARCH-EPD errors as the best model. This model captures the volatility clustering and extreme tail returns of the swaps during the crisis. Prior to November 2007, only four months ahead of Bear Stearns' collapse though, the swap spreads were indistinguishable statistically from the risk free rate.

Suggested Citation

  • Liuling Li & Bruce Mizrach, 2010. "Tail Return Analysis of Bear Stearns Credit Default Swaps," Departmental Working Papers 201003, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:201003
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    Cited by:

    1. Ferrara, Gerardo & Kim, Jun Sung & Koo, Bonsoo & Liu, Zijun, 2021. "Counterparty choice in the UK credit default swap market: An empirical matching approach," Economic Modelling, Elsevier, vol. 94(C), pages 58-74.

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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