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Tail Return Analysis of Bear Stearns Credit Default Swaps

Listed author(s):
  • Liuling Li

    ()

    (Nankai University)

  • Bruce Mizrach

    ()

    (Rutgers University)

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.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 201003.

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Length: 20 pages
Date of creation: 10 Mar 2010
Handle: RePEc:rut:rutres:201003
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