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Extreme Risks During the U. S. Financial Crisis: An Empirical Study of the Credit Default Swap Market

Byström, Hans LU (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)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Global Business and Finance Review
volume
18
issue
1
pages
34 - 47
ISSN
1088-6931
language
English
LU publication?
yes
id
345938c4-dc68-4632-896e-26bab1d2820a (old id 3633505)
date added to LUP
2013-04-16 13:22:43
date last changed
2016-04-16 06:25:07
@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},
  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},
}