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Article

Counterparty Risk in Exchange-Traded
Notes (ETNs)

Balazs Cserna, Ariel Levy and Zvi Wiener
The Journal of Fixed Income Summer 2013, 23 (1) 76-101; DOI: https://doi.org/10.3905/jfi.2013.23.1.076
Balazs Cserna
is a research fellow at Johann Wolfgang Goethe University Frankfurt in Frankfurt, Germany.
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  • For correspondence: cserna@em.uni-frankfurt.de
Ariel Levy
is a research fellow at Technion-Israel Institute of Technology, Faculty of Industrial Engineering & Management in Haifa, Israel.
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  • For correspondence: levy@ie.technion.ac.il
Zvi Wiener
is an associate professor at the Hebrew University of Jerusalem, School of Business Administration in Jerusalem, Israel.
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  • For correspondence: zvi.wiener@huji.ac.il
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Abstract

This article addresses the issue of counterparty credit risk in exchange-traded notes (ETNs). An ETN is a tracking product that is designed as an unsecured debt security and is therefore subject to the issuer’s default risk. The authors use a standard reduced-form pricing framework to gauge the theoretical effect credit risk should have on ETNs. They then derive firm-specific credit risk measures by using real market data to construct model-implied risk-adjusted ETN prices. Their results indicate that a substantial credit risk discount should be priced into ETNs. In sharp contrast, however, based on real market ETN quotes, they found very little evidence for credit risk pricing by market players.

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The Journal of Fixed Income: 23 (1)
The Journal of Fixed Income
Vol. 23, Issue 1
Summer 2013
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Counterparty Risk in Exchange-Traded
Notes (ETNs)
Balazs Cserna, Ariel Levy, Zvi Wiener
The Journal of Fixed Income Jun 2013, 23 (1) 76-101; DOI: 10.3905/jfi.2013.23.1.076

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Counterparty Risk in Exchange-Traded
Notes (ETNs)
Balazs Cserna, Ariel Levy, Zvi Wiener
The Journal of Fixed Income Jun 2013, 23 (1) 76-101; DOI: 10.3905/jfi.2013.23.1.076
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  • Article
    • Abstract
    • MECHANICS OF ETNs
    • BENCHMARK MODEL FOR ETNs
    • INCOMPLETE ACCOUNTING INFORMATION
    • CDS MODEL FOR PARAMETER ESTIMATION
    • ESTIMATION STRATEGY
    • DATA
    • RESULTS
    • REAL AND IMPLIED DISCOUNT CORRELATION
    • ADDITIONAL CDS MATURITIES
    • ALTERNATIVE MEASURES FOR CREDIT RISK
    • SUMMARY
    • APPENDIX A
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
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  • PDF (Subscribers Only)

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