Counterparty Risk in Exchange Traded Notes (ETNs): Theory and Evidence

Posted: 11 Mar 2012

See all articles by Balazs Cserna

Balazs Cserna

University of Frankfurt

Ariel Levy

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Date Written: March 8, 2012

Abstract

In this paper we address the issue of counterparty credit risk in Exchange Traded Notes (ETNs). An ETN is a tracking product which is designed as an unsecured debt security. As such, it is subject to the issuers default risk. We describe a standard reduced-form pricing framework to gauge the theoretical effect credit risk should have on ETNs. We then derive firm specific real market credit risk measures using CDS data to construct model implied risk-adjusted ETN prices. Our results indicate that a substantial credit risk discount ought to be priced into ETNs. In sharp contrast, however, we find no evidence for credit risk pricing by market players based on real market ETN quotes. We allude to several behavioral biases that are consistent with our results.

Keywords: credit risk, structured products, ETN, ETF, CDS, behavioral

JEL Classification: G00, G02, G10, G122, G14, G21, G32

Suggested Citation

Cserna, Balazs and Levy, Ariel and Wiener, Zvi, Counterparty Risk in Exchange Traded Notes (ETNs): Theory and Evidence (March 8, 2012). Available at SSRN: https://ssrn.com/abstract=2018223 or http://dx.doi.org/10.2139/ssrn.2018223

Balazs Cserna

University of Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Zvi Wiener (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

No contact information is available for Ariel Levy

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