A value at risk analysis of credit default swaps

Martin Scheicher and Burkhard Raunig

No 2008,12, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre

Abstract: We study the risk of holding credit default swaps (CDS) in the trading book. In particular, we compare the Value at Risk (VaR) of a CDS position to the VaR for investing in the respective firm?s equity. Our sample consists of CDS ? stock price pairs for 86 actively traded firms over the period from March 2003 to October 2006. We find that the VaR for a stock is usually far larger than the VaR for a position in the same firm?s CDS. However, the distance between CDS VaR and equity VaR is markedly smaller for firms with high credit risk. The distance also declines for longer holding periods. We also observe a positive correlation between CDS and equity VaR.

Keywords: Credit default swap; Value at Risk; Capital structure arbitrage (search for similar items in EconPapers)
JEL-codes: G13 G12 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-rmg
Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:zbw:bubdp2:7322

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