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The Role of Market-Implied Severity Modeling for Credit VaR

Author

Listed:
  • J. Samuel Baixauli

    (Department of Management and Finance, University of Murcia)

  • Susana Alvarez

    (Department of Quantitative Methods for the Economy and Business, University of Murcia)

Abstract

In this paper a beta-component mixture is proposed to model the market-implied severity. Recovery rates are extracted and identified from credit default swaps instead of using defaulted bonds instead using defaulted bonds because it allows us to identify recovery rates of low probability of default companies. An empirical analysis is carried out and the results show that a single beta distribution is rejected as a correct specification for implied severity while a beta-component mixture is accepted. Furthermore, the importance of this modeling approach is highlighted by focusing on its role for credit VaR.

Suggested Citation

  • J. Samuel Baixauli & Susana Alvarez, 2010. "The Role of Market-Implied Severity Modeling for Credit VaR," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 337-353, November.
    • Handle: RePEc:cuf:journl:y:2010:v:11:i:2:p:337-353
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    References listed on IDEAS

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    Cited by:

    1. Yashkir, Olga & Yashkir, Yuriy, 2013. "Loss Given Default Modelling: Comparative Analysis," MPRA Paper 46147, University Library of Munich, Germany.

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    More about this item

    Keywords

    Implied severity; Credit default swaps; Beta-component mixture; Credit VaR;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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