An Empirical Analysis of Equity Default Swaps Ii: Multivariate Insights

32 Pages Posted: 1 Apr 2005

Date Written: March 3, 2005

Abstract

Equity Default Swaps (EDS) - contracts that trigger a payment when the underlying equity price falls below a predetermined level - have attracted much attention recently because of their similarities to credit default swaps (CDS) on the one hand, and American digital puts on the other. Particular interest has been received by Collateralized Debt Obligations (CDOs) referencing a portfolio of EDSs, which not only requires the univariate assessment of the risks inherent in EDSs, but also the analysis of dependencies between EDSs (and other asset classes). In this paper, we specifically address correlation or dependency aspects of EDSs, by applying techniques developed for estimating default correlation. Based on Standard & Poor's CreditPro and Compustat (North America) databases, extensive empirical research is presented. Amongst the main findings are that EDS correlations for standard strikes/barriers of 30% are significantly higher than default correlations, and increase in barrier level, but only for strikes above 50%. This indicates a barrier dependent correlation concept.

Keywords: EDS, Equity Default Swap, correlation, dependence

JEL Classification: C14, C81

Suggested Citation

Jobst, Norbert and de Servigny, Arnaud, An Empirical Analysis of Equity Default Swaps Ii: Multivariate Insights (March 3, 2005). Available at SSRN: https://ssrn.com/abstract=681145 or http://dx.doi.org/10.2139/ssrn.681145

Norbert Jobst (Contact Author)

Standard & Poor's ( email )

20 Canada Square
Canary Warf
London, E14 5LH
United Kingdom

Arnaud De Servigny

Standard & Poor's ( email )

20 Canada Square
Canary Warf
London E14 5LH
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
409
Abstract Views
2,303
Rank
142,581
PlumX Metrics