Tuesday, October 12, 2010

van Duyn: CDS poor predictors of risk

Mr Grossman said the most surprising result of the study was the high volatility in probability of default implied by CDS spreads.

The implied probability of default for bond insurers rose nearly 80 times from before the credit crisis to the peak levels during the crisis, while that for Reits rose nearly 30 times and the probability of default for banks and insurers and for homebuilders by about 15 times and 5 times respectively.

“Volatility in CDS spreads over the cycle translated into dramatic shifts in implied probability of defaults, reducing their usefulness as gauges of medium-term credit risk,” the report said

No comments:

Post a Comment