Quantitative Risk Estimation In The Credit Default Swap Market Using Extreme Value Theory

Date Added: Apr 2010
Format: PDF

This paper is motivated by empirical evidence illustrating the non-Gaussian nature of financial returns, (Jondeau et al 2007) and analyses Extreme Value Theory, (EVT) as a proposed improvement (Embrechts et al., 2005) for risk estimation techniques. Credit Default Swaps, (CDS's) are analysed due to their increasing important to financial stability (European Union, 2009) and due to the lack of quantitative univariate risk analysis of this market. EVT is generally applied to currency, equity and bond markets, (Assaf, 2009). Whereas the majority of quantitative analysis of the CDS market has focused on multivariate functions, analysing the dependency of CDS market returns and other asset returns, (Chen et al., 2008). Equity and bond samples are used here as a comparison to the CDS market returns.