PT - JOURNAL ARTICLE AU - Rachel Campbell AU - Ronald Huisman TI - Measuring Credit Spread Risk AID - 10.3905/jpm.2003.319901 DP - 2003 Jul 31 TA - The Journal of Portfolio Management PG - 121--127 VI - 29 IP - 4 4099 - https://pm-research.com/content/29/4/121.short 4100 - https://pm-research.com/content/29/4/121.full AB - It is widely known that the possibility of default makes the expected return distribution for financial products that are subject to credit risk highly skewed and fat-tailed. Recent development of an unbiased tail index estimator enables modeling of the additional risk presented by changes in swap spreads. Tests on data from the U.S., the U.K., Germany, and Japan indicate that we tend to grossly underestimate the risk of large spread widenings and tightenings. Estimation of swap spread risk is dramatically improved when the severity of the additional downside risk is measured and incorporated into current estimation techniques. These results are crucial in improving credit risk management and pricing out-of-the-money credit derivatives.