Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2011-01
The Use of Credit Default Swaps by
U.S Fixed-Income Mutual Funds
November 19, 2010
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2011-01
The Use of Credit Default Swaps by
U.S Fixed-Income Mutual Funds
November 19, 2010
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
The Use of Credit Default Swaps by
U.S. Fixed-Income Mutual Funds
Tim Adam, Humboldt University* and Risk Management Institute (Singapore)
Andre Guettler, University of Texas at Austin and EBS Business School†
November 19, 2010
Abstract
We examine the use of credit default swaps (CDS) in the U.S. mutual fund industry. We find that
among the largest 100 corporate bond funds the use of CDS has increased from 20% in 2004 to
60% in 2008. Among CDS users, the average size of CDS positions (measured by their notional
values) increased from 2% to almost 14% of a fund’s net asset value. Some funds exceed this
level by a wide margin. CDS are predominantly used to increase a fund’s exposure to credit risks
rather than to hedge credit risk. Consistent with fund tournaments, underperforming funds use
multi-name CDS to increase their credit risk exposures. Finally, funds that use CDS
underperform funds that do not use CDS. Part of this underperformance is caused by poor market
timing.
JEL-Classification: G11, G15, G23
Keywords: Corporate bond fund, credit default swap, credit risk, fund performance, hedging,
speculation, tournaments
* Humboldt University, Institute of Corporate Finance, Dorotheenstr. 1, 10117 Berlin, Germany, Tel.: +49 30 2093-
5641, E-mail: tim.adam@wiwi.hu-berlin.de (corresponding author).
† McCombs School of Business, Department of Finance, andre.guettler@mccombs.utexas.edu; EBS Business
School, Department of Finance, Accounting and Real Estate, Gustav-Stresemann-Ring 3, 65189 Wiesbaden,
Germany, E-mail: andre.guettler@ebs.edu.
We thank Carsten Hirsch, Holger Kraft, Paul Kupiec, Darius Miller, Alexandra Niessen, George Pennacchi, Stefan
Ruenzi, Pablo Ruiz-Verdú, Clemens Sialm, Laura Starks, Peter Tufano, and seminar participants at CUHK, Erasmus
University of Rotterdam, ESMT, the 2009 FDIC fall workshop, HKU, HKUST, University of Mannheim, Nanyang
Technological University, the University of Texas at Austin, and the Wirtschaftsuniversitaet Wien for very helpful
suggestions and comments. We further thank Dominika Galkiewicz for excellent research assistance. Financial
support by the German Science Foundation (DFG) and the Federal Deposit Insurance Corporation (FDIC) is
gratefully acknowledged.
U.S. Fixed-Income Mutual Funds
Tim Adam, Humboldt University* and Risk Management Institute (Singapore)
Andre Guettler, University of Texas at Austin and EBS Business School†
November 19, 2010
Abstract
We examine the use of credit default swaps (CDS) in the U.S. mutual fund industry. We find that
among the largest 100 corporate bond funds the use of CDS has increased from 20% in 2004 to
60% in 2008. Among CDS users, the average size of CDS positions (measured by their notional
values) increased from 2% to almost 14% of a fund’s net asset value. Some funds exceed this
level by a wide margin. CDS are predominantly used to increase a fund’s exposure to credit risks
rather than to hedge credit risk. Consistent with fund tournaments, underperforming funds use
multi-name CDS to increase their credit risk exposures. Finally, funds that use CDS
underperform funds that do not use CDS. Part of this underperformance is caused by poor market
timing.
JEL-Classification: G11, G15, G23
Keywords: Corporate bond fund, credit default swap, credit risk, fund performance, hedging,
speculation, tournaments
* Humboldt University, Institute of Corporate Finance, Dorotheenstr. 1, 10117 Berlin, Germany, Tel.: +49 30 2093-
5641, E-mail: tim.adam@wiwi.hu-berlin.de (corresponding author).
† McCombs School of Business, Department of Finance, andre.guettler@mccombs.utexas.edu; EBS Business
School, Department of Finance, Accounting and Real Estate, Gustav-Stresemann-Ring 3, 65189 Wiesbaden,
Germany, E-mail: andre.guettler@ebs.edu.
We thank Carsten Hirsch, Holger Kraft, Paul Kupiec, Darius Miller, Alexandra Niessen, George Pennacchi, Stefan
Ruenzi, Pablo Ruiz-Verdú, Clemens Sialm, Laura Starks, Peter Tufano, and seminar participants at CUHK, Erasmus
University of Rotterdam, ESMT, the 2009 FDIC fall workshop, HKU, HKUST, University of Mannheim, Nanyang
Technological University, the University of Texas at Austin, and the Wirtschaftsuniversitaet Wien for very helpful
suggestions and comments. We further thank Dominika Galkiewicz for excellent research assistance. Financial
support by the German Science Foundation (DFG) and the Federal Deposit Insurance Corporation (FDIC) is
gratefully acknowledged.