Tail Return Analysis of Bear Stearns Credit Default Swaps

28 Pages Posted: 11 Mar 2010 Last revised: 16 Mar 2010

See all articles by Liuling Li

Liuling Li

Nankai University

Bruce Mizrach

Rutgers University, Department of Economics

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

Suggested Citation

Li, Liuling and Mizrach, Bruce, Tail Return Analysis of Bear Stearns Credit Default Swaps (March 10, 2010). Available at SSRN: https://ssrn.com/abstract=1568162 or http://dx.doi.org/10.2139/ssrn.1568162

Liuling Li

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

Bruce Mizrach (Contact Author)

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States
(848) 932-8636 (Phone)
(732) 932-7416 (Fax)

HOME PAGE: http://snde.rutgers.edu/

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