Tail Return Analysis of Bear Stearns Credit Default Swaps
28 Pages Posted: 11 Mar 2010 Last revised: 16 Mar 2010
Date Written: March 10, 2010
Abstract
We compare several models for Bear Stearns' credit default swap spreads estimated via a Markov chain Monte Carlo algorithm. The Bayes Factor selects a CKLS model with GARCH-EPD errors as the best model. This model captures the volatility clustering and extreme tail returns of the swaps during the crisis. Prior to November 2007, only four months ahead of Bear Stearns' collapse though, the swap spreads were indistinguishable statistically from the risk free rate.
Keywords: Bear Stearns, credit default swaps, Bayesian analysis, exponential power distribution
JEL Classification: C11, C15, G13, G24
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