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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

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: E43 G12 G13 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: A value at risk analysis of cedit default swaps (2008) Downloads
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