Counterparty Risk in Exchange Traded Notes (ETNs): Theory & Evidence
Posted: 30 Aug 2012
Date Written: July 4, 2012
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: Suggested Citation