Measuring Credit Spread Risk
It is widely known that the small but looming possibility of default renders the expected return distribution for financial products containing credit risk to be highly skewed and fat tailed. In this paper we apply recent techniques developed for incorporating the additional risk faced by changes in swap spreads. Using data from the US, UK, Germany, and Japan, we find that the risk faced from large spread widenings and tightenings is grossly underestimated. Estimation of swap spread risk is dramatically improved when the severity of the fat tails is measured and incorporated into current estimation techniques.
|Keywords||Market Risk, backtesting, extreme Value theory, parametric distributions, value-at-risk|
|Publisher||Erasmus Research Institute of Management (ERIM)|
Campbell-Pownall, R.A.J., & Huisman, R.. (2002). Measuring Credit Spread Risk (No. ERS-2002-95-F&A). Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/241