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An Empirical Analysis of Equity Default Swaps (I): Univariate Insights

Author

Listed:
  • Arnaud_de_Servigny

    (Standard & Poor's)

  • Norbert_Jobst

    (Standard&Poor's)

Abstract

The aim of this paper is to describe a new methodology to assess the risk of any Equity Default Swap (EDS). We show that as credit ratings can measure counter-party risk, it is technically possible to provide a quantitatively derived “through the cycle” risk estimate for EDSs. Whereas in the case of CDSs, the assessment is relevant at an issuer level, for EDSs it makes sense at an issue level. The reason for such a difference is that unlike for pure credit risk, the risk on EDSs directly depends on equity market conditions at origination and is therefore not fully counterparty specific. The outcome of this paper is that though this new methodology is purely quantitative, its level of performance is surprisingly high with superior results compared to previously developed techniques.

Suggested Citation

  • Arnaud_de_Servigny & Norbert_Jobst, 2005. "An Empirical Analysis of Equity Default Swaps (I): Univariate Insights," International Finance 0503007, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0503007
    Note: Type of Document - pdf; pages: 35
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0503/0503007.pdf
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    References listed on IDEAS

    as
    1. Til Schuermann & Yusuf Jafry, 2003. "Measurement and Estimation of Credit Migration Matrices," Center for Financial Institutions Working Papers 03-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Norbert_Jobst & Arnaud_de_Servigny, 2005. "An Empirical Analysis of Equity Default Swaps (II): Multivariate Insights," Finance 0503025, EconWPA.
    3. Christensen, Jens H.E. & Hansen, Ernst & Lando, David, 2004. "Confidence sets for continuous-time rating transition probabilities," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2575-2602, November.
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    Cited by:

    1. Norbert_Jobst & Arnaud_de_Servigny, 2005. "An Empirical Analysis of Equity Default Swaps (II): Multivariate Insights," Finance 0503025, EconWPA.

    More about this item

    Keywords

    EDS Equity Default Swap;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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