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A value at risk analysis of cedit default swaps

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  • Scheicher, Martin
  • Raunig, Burkhard

Abstract

We investigate the risk of holding credit default swaps(CDS) in the trading book and compare the Value at Risk (VaR) of a CDS position to the VaR for investing in the respective firm's equity using a sample 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 ratio between CDS and equity VaR is markedly smaller for firms with high credit risk. The ratio also declines for longer holding periods. We also observe a positive correlation between CDS and equity VaR. Panel regressions suggest that our findings are consistent with qualitative predictions of the Merton (1974) model. JEL Classification: E43, G12, G13

Suggested Citation

  • Scheicher, Martin & Raunig, Burkhard, 2008. "A value at risk analysis of cedit default swaps," Working Paper Series 968, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2008968
    Note: 152802
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    References listed on IDEAS

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    Cited by:

    1. Aldasoro, Iñaki & Barth, Andreas, 2017. "Syndicated loans and CDS positioning," ESRB Working Paper Series 58, European Systemic Risk Board.

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    More about this item

    Keywords

    credit default swap; Structural Credit Risk Models; Value at Risk;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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