Search results for "Credit default swap index"
showing 4 items of 4 documents
Robust Recovery Risk Hedging: Only the First Moment Matters
2009
Credit derivatives are subject to at least two sources of risk: the default time and the recovery payment. This paper examines the impact of modeling the recovery payment on hedging strategies in a reduced-form model as well as a structural model. We show that all hedging approaches based on a quadratic criterion do only depend on the expected recovery payment at default and not the whole shape of the recovery payment distribution if the underlying hedging instrument (say, a defaultable zero coupon bond) jumps to or reaches a pre-specified value when the credit event occurs. This justifies assuming a \emph{certain} recovery rate conditional on default time and interest rate level. Hence, th…
Asymmetric determinants of CDS spreads: U.S. industry-level evidence through the NARDL approach
2017
Abstract This paper investigates the presence of asymmetries in the short- and long-run relationships between the 5-year CDS index spreads at the U.S. industry level and a set of major macroeconomic and financial variables, namely the corresponding industry stock indices, the VIX index, the 5-year Treasury bond yield and the crude oil price, using the NARDL approach. The empirical results provide significant evidence of both short-run and long-run asymmetries in the linkage between ten industry CDS spreads and the potential driving factors common for all industries, confirming the importance of asymmetric nonlinearity in this context. It is also shown that the industry equity prices, the VI…
Portfolio diversification in the sovereign credit swap markets
2018
We develop models for portfolio diversification in the sovereign credit default swaps (CDS) markets and show that, despite literature findings that sovereign CDS spreads are affected by global factors, there is sufficient idiosyncratic risk to be diversified. However, we identify regime switching in the times series of CDS spreads and spread returns, and the optimal diversified strategies can be regime dependent. The developed models trade off the CVaR risk measure against expected return, consistently with the statistical properties of spreads. We consider three investment strategies suited for different CDS market participants: for investors with long positions, speculators that hold unco…
Is There a Credit Risk Anomaly in FX Markets?
2015
This paper explores whether a link between sovereign credit ratings and currency returns exists. Perhaps contrary to expectations, it finds that currencies of countries with higher credit risk tend to generate lower returns than those with a lower credit risk. The credit risk spread cannot be explained by standard risk factors.