Measuring Credit Spread Risk

24 Pages Posted: 26 Feb 2008

See all articles by Rachel A.J. Pownall

Rachel A.J. Pownall

Tilburg University - Department of Finance; Maastricht University - Department of Finance

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: 22 2002, 10

Abstract

It is widely known that the small but looming possibility of defaultrenders the expected return distribution for financial productscontaining credit risk to be highly skewed and fat tailed. In thispaper we apply recent techniques developed for incorporating theadditional risk faced by changes in swap spreads. Using data from theUS, UK, Germany, and Japan, we find that the risk faced from largespread widenings and tightenings is grossly underestimated. Estimationof swap spread risk is dramatically improved when the severity of thefat tails is measured and incorporated into current estimationtechniques.

Keywords: Market Risk, value-at-risk, extreme Value theory, parametric distributions, backtesting

JEL Classification: M, M41, G3, G24

Suggested Citation

Pownall, Rachel Ann Jane and Huisman, Ronald, Measuring Credit Spread Risk (22 2002, 10). ERIM Report Series Reference No. ERS-2002-95-F&A. Available at SSRN: https://ssrn.com/abstract=1097885

Rachel Ann Jane Pownall (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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