Pricing and integration of credit default swap index tranches

Abstract

This paper first designs an efficient procedure to value Credit Default Swap Index tranches using an intensity‐based model. The tranche spreads are effectively explained by a three‐factor version of this model, both before and during the financial crisis of 2008. We then construct tradable tranche portfolios to track the intensity factors and compare the pricing of the tranches with equities and their derivatives. Our results show that the senior tranche spreads do not offer returns in excess of the common risk compensations in the equity and derivatives markets, while the junior tranche is not spanned by these standard factors.

Forty years of the Journal of Futures Markets: A bibliometric overview

“…The smallest cluster on default swaps and monetary policy contains 57 articles cited 497 times. Articles related to default swaps deal with the credit default swap premia (Benkert, 2004), the sensitivity of collateralized debt obligations (Meneguzzo & Vecchiato, 2004), pricing and integration of credit default swaps (Carverhill & Luo, 2020), risk in bank default swaps (Huang, 2020), credit default swap spreads (Huang et al, 2019), and credit risk (Elkamhi et al, 2012). Articles on monetary policy include predictors of monetary policy (Krueger & Kuttner, 1996) and the effect of monetary policy on stocks and commodities (Basistha & Kurov, 2015; Vähämaa & Äijö, 2011).…”