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

Posted: 30 Aug 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: July 4, 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 and is therefore subject to the issuer's 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 Credit Default Swap (CDS) data to construct model-implied risk-adjusted ETN prices. Our results indicate that a substantial credit risk discount should be priced into ETNs. In sharp contrast, however, based on real market ETN quotes, we found no evidence for credit risk pricing by market players.

Keywords: counterparty risk, structured products, cds, ETF, ETN

JEL Classification: G10, G15, G18

Suggested Citation

Cserna, Balazs and Levy, Ariel and Wiener, Zvi, Counterparty Risk in Exchange Traded Notes (ETNs): Theory & Evidence (July 4, 2012). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2138484 or http://dx.doi.org/10.2139/ssrn.2138484

Balazs Cserna

University of Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Zvi Wiener

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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