The Role of Market-Implied Severity Modeling for Credit VaR

J. Baixauli and Susana Alvarez
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J. Baixauli: Department of Management and Finance, University of Murcia
Susana Alvarez: Department of Quantitative Methods for the Economy and Business, University of Murcia

Annals of Economics and Finance, 2010, vol. 11, issue 2, 337-353

Abstract: In this paper a beta-component mixture is proposed to model the market-implied severity. Recovery rates are extracted and identified from credit default swaps instead of using defaulted bonds instead using defaulted bonds because it allows us to identify recovery rates of low probability of default companies. An empirical analysis is carried out and the results show that a single beta distribution is rejected as a correct specification for implied severity while a beta-component mixture is accepted. Furthermore, the importance of this modeling approach is highlighted by focusing on its role for credit VaR.

Keywords: Implied severity; Credit default swaps; Beta-component mixture; Credit VaR (search for similar items in EconPapers)
JEL-codes: G13 G20 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2010:v:11:i:2:p:337-353

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