Hugues Pirotte

Swap Credit Risk: An Empirical Investigation on Transaction Data

Currency and interest rate swaps are subject to a complex, two-sided default risk. Although several theoretical papers have recently addressed the problem of pricing swap credit risk, the empirical literature is almost non-existent. This is the only study we know of that uses actual transaction data to document the effect of credit risk on swap spreads. We provide results for both interest rate and currency swaps.

How well do classical credit risk pricing models fit swap transaction data

Currency and interest rate swaps are subject to a complex, two-sided default risk. Several theoretical papers have recently addressed the problem of pricing this swap credit risk. We implement a recent credit risk pricing model in an attempt to evaluate one of the main lines of research in theoretical credit risk analysis. We compare the model’s analytical results to actual transaction data thanks to a unique academic database on swap transaction data.

Sector classification through non-Gaussian similarity

Standard sector classification frameworks present drawbacks that might hinder portfolio managers. This article introduces a new nonparametric approach to equity classification. Returns are decomposed into their fundamental drivers through Independent Component Analysis (ICA). Stocks are then classified according to the relative importance of the identified fundamental drivers for their returns. A method is developed permitting the quantification of these dependencies, using a similarity index. Hierarchical clustering allows for grouping the stocks into new classes. The resulting classes are compared with those from the two-digit Global Industry Classification System (GICS) for US blue chip companies. It is shown that specific relations between stocks are not captured by the GICS framework. The method is tested for robustness and successfully applied to portfolio management.

Does Manager Offshore Experience Countin the Alternative UCITS Universe

This article examines the performance of alternative UCITS funds on the basis of manager offshore experience and, additionally, the existence of an “equivalent” offshore hedge fund. Managers with offshore experience are defined as management companies managing offshore hedge funds in addition to managing UCITS. For a sample period from 2008 to 2011, the authors find that such UCITS have a positive alpha, still with a P-value of 0.12 due to the limited size of the subsamples, which could provide some evidence of offshore manager added value. Among these UCITS, they identify further those that have an equivalent offshore hedge fund whose performance is replicated by using the same or a similar strategy, or through a swap. The authors find that “offshore-experienced” UCITS without offshore equivalents 1) exhibit no meaningful differences in mean performance compared to those with equivalents, but are 2) generally less volatile and show a positive significant alpha at the 95% level. Concentrating then on those with equivalent offshore hedge funds, the onshore-offshore comparison shows no significant differences in mean performance and volatility when they use equally-weighted indexes but an offshore outperformance when they do a cross-sectional study. The authors also find a sizable regulation-induced tracking error.

Assessing the Performance of Funds of Hedge Funds

This paper studies the performance of a sample of funds of hedge funds (FoHFs) from January 1994 to August 2009. We apply the false discoveries (FD) technique of Barras, Scaillet and Wermers (2010) to separate the FoHFs into skilled, zero-alpha and unskilled. We measure the alpha of the FoHFs using two models – (1) a 16-factor model with a combination of factors from Fung and Hsieh (2004) and Capocci, Corhay and Hubner (2005) and (2) a 13-factor model of hedge fund indices from Dow Jones Credit Suisse. Applying the FD procedure to the first model, we find that, after fees, the majority of FoHFs do not channel alpha from single-manager hedge funds. Applying the FD procedure to the second model, we find that only a very small fraction of FoHFs deliver after-fees alpha per se, i.e. on top of the alpha of the hedge fund indices. A series of robustness checks confirms the results of the FD procedure. We also compare the performance of our sample of FoHFs to artificial FoHFs constructed by randomly picking hedge funds. The lack of significant differences in the average performance of the real and artificial FoHFs confirms the results obtained by the FD procedure.

Unveiling Sovereign Effects in European Banks CDS Spreads Variations

Starting from the structural model developed by Merton (1974) and the derived notion of distance-to-default, we study the determinants of credit default swap (CDS) spreads for a sample of European banks over a period from January 2006 to December 2011. In particular, we test variables that are specific to the banking industry and look at the possible interaction with CDS spreads for the related sovereigns. We confirm findings from the literature review regarding the low significance of the structural model and its breakdown in times of stress. We confirm the importance of macro-economic components such as the general level of interest rates and the general state of the economy, particularly in times of stress. We find that before the crisis period the micro- and macro-components are generally predominant in the determination of CDS spread variations while the influence of sovereigns’ CDS become more important when entering further into the crisis period. Interestingly, southern European countries are the first to become significant at the start of the crisis. Progressively, all CDS countries become increasingly significant, overweigh all other explanatory variables and remain so even after the crisis period, thereby suggesting the focused attention of market participants for the sovereign dimension.