Is Tail Risk Priced in Credit Default Swap Premia?

Review of Finance (Forthcoming)

82 Pages Posted: 5 Apr 2013 Last revised: 14 Feb 2015

See all articles by Christian Meine

Christian Meine

Ruhr University of Bochum

Hendrik Supper

University of Dortmund - Department of Business

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Date Written: February 9, 2015

Abstract

We show that the propensity of a bank to experience extreme comovements in its credit default swap premia together with the market is priced in the bank's default swap spread during the financial crisis. We measure a bank's CDS tail beta by estimating the upper tail dependence between its default swap spreads and a credit default swap market index. Our study shows that protection sellers receive a premium for bearing the risk of extreme upward comovements in default risk. The economic significance of this effect is large yet limited to the recent financial crisis. Banks in the upper quintile of CDS tail beta have spreads that are on average 140 basis points higher than those of banks in the lower CDS tail beta quintile.

Keywords: Credit default swaps, CDS tail beta, asymmetric extreme dependence, tail risk, copulas

JEL Classification: G21, C58, G01

Suggested Citation

Meine, Christian and Supper, Hendrik and Weiss, Gregor N. F., Is Tail Risk Priced in Credit Default Swap Premia? (February 9, 2015). Review of Finance (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2244808 or http://dx.doi.org/10.2139/ssrn.2244808

Christian Meine (Contact Author)

Ruhr University of Bochum ( email )

Universitätsstraße 150
Bochum, NRW 44801
Germany

Hendrik Supper

University of Dortmund - Department of Business ( email )

Otto-Hahn-Str. 6a
Dortmund, 44227
Germany

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

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