Performance Persistence of Credit Default Swaptions. Evidence From the USD Default Swaptions Derivative Market

In this article, we test performance persistence and measure the historical, the implied volatility, the credit spread volatility and the value at risk,VaR, of the credit derivatives swaptions contracts. We examine contracts of US leveraged loans, mortgage backed securities, high grade corporate bonds, high yield loans and small and big leveraged stocks. We use a value at risk methodology, VaR. We demonstrate the extent to which the mean-variance approach underestimates the tail risk of the probability distribution. We compare the long and short - run performance returns after fees deduction with the expected losses that are recorded at particular month with 95% and 99% confidence levels. The implied and the credit spread volatility are quite high as there are large fluctuations of average returns of credit derivatives swap contracts. The results are mixed for both winners and losers. We found strong evidence of performance persistence in the swaptions market over first and third year periods. This is the first study that provides a detailed analysis of performance persistence using data from the Chicago mercantile exchange, CME, derivative market for options. The sample for credit derivatives is provided from creditedge and Moody’s corporation that acquired KMV corporation in 2002. It includes credit derivatives swap contracts, expected default frequencies,EDF, and credit spreads over the period 2010 to 2023