Friday, October 15, 2010

Robust Linkages between CDs and Credit Spreads

By Rajna Gibson and Silika Prohl

Abstract: We propose a new statistical technique, namely the wild bootstrap base method, to study the relationship between the CDS and the bond credit spreads. The finite sample properties of this statistical methodology are studied in several numerical experiments. We next apply this technique to a large sample of US and European firms' CDS data and report robust linkage between the CDS and credit spreads of highly rated companies. Furthermore, we compute the Value-at-Risk associated with CDS holdings and show that sudden jumps in volatility in August 2007 influenced their estimated VaR figures.

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