RT Journal Article
SR Electronic
T1 Measuring Credit Spread Risk
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 121
OP 127
DO 10.3905/jpm.2003.319901
VO 29
IS 4
A1 Rachel Campbell
A1 Ronald Huisman
YR 2003
UL https://pm-research.com/content/29/4/121.abstract
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.