Extreme Risks During the U. S. Financial Crisis: An Empirical Study of the Credit Default Swap Market
(2013) In Global Business and Finance Review 18(1). p.34-47- Abstract
- In this paper we focus on the many extreme credit default swap spread movements observed during the recent credit crisis. We find that the tails of the spread (and price) change distribution differ significantly from those of the normal distribution even for diversified credit derivatives portfolios. Particular focus is put on the sudden shift in the behavior of the credit default swap market in the summer of 2007. During the first month of the crisis, July 2007, we find the extreme turbulence in the credit derivatives market to be comparable only to the turmoil in the equity market in October 1987 and in October 2008. As a result of this extreme behavior and the dramatic regime shift observed at the start of the crisis, we find credit... (More)
- In this paper we focus on the many extreme credit default swap spread movements observed during the recent credit crisis. We find that the tails of the spread (and price) change distribution differ significantly from those of the normal distribution even for diversified credit derivatives portfolios. Particular focus is put on the sudden shift in the behavior of the credit default swap market in the summer of 2007. During the first month of the crisis, July 2007, we find the extreme turbulence in the credit derivatives market to be comparable only to the turmoil in the equity market in October 1987 and in October 2008. As a result of this extreme behavior and the dramatic regime shift observed at the start of the crisis, we find credit derivatives portfolio Value at Risk estimates based on extreme value theory to be more accurate than those based on the normal-, the Student’s t- or the historical distribution. We find similar results during the crisis and in the comparably tranquil years leading up to the crisis. The results are qualitatively the same for investment-grade and high-yield credits. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/3633505
- author
- Byström, Hans LU
- organization
- publishing date
- 2013
- type
- Contribution to journal
- publication status
- published
- subject
- in
- Global Business and Finance Review
- volume
- 18
- issue
- 1
- pages
- 34 - 47
- publisher
- People and Global Business Association
- ISSN
- 1088-6931
- language
- English
- LU publication?
- yes
- id
- 345938c4-dc68-4632-896e-26bab1d2820a (old id 3633505)
- date added to LUP
- 2016-04-04 09:14:25
- date last changed
- 2018-11-21 20:51:44
@article{345938c4-dc68-4632-896e-26bab1d2820a, abstract = {{In this paper we focus on the many extreme credit default swap spread movements observed during the recent credit crisis. We find that the tails of the spread (and price) change distribution differ significantly from those of the normal distribution even for diversified credit derivatives portfolios. Particular focus is put on the sudden shift in the behavior of the credit default swap market in the summer of 2007. During the first month of the crisis, July 2007, we find the extreme turbulence in the credit derivatives market to be comparable only to the turmoil in the equity market in October 1987 and in October 2008. As a result of this extreme behavior and the dramatic regime shift observed at the start of the crisis, we find credit derivatives portfolio Value at Risk estimates based on extreme value theory to be more accurate than those based on the normal-, the Student’s t- or the historical distribution. We find similar results during the crisis and in the comparably tranquil years leading up to the crisis. The results are qualitatively the same for investment-grade and high-yield credits.}}, author = {{Byström, Hans}}, issn = {{1088-6931}}, language = {{eng}}, number = {{1}}, pages = {{34--47}}, publisher = {{People and Global Business Association}}, series = {{Global Business and Finance Review}}, title = {{Extreme Risks During the U. S. Financial Crisis: An Empirical Study of the Credit Default Swap Market}}, volume = {{18}}, year = {{2013}}, }