It is widely known that the small but looming possibility of default
renders the expected return distribution for financial products
containing credit risk to be highly skewed and fat tailed. In this
paper we apply recent techniques developed for incorporating the
additional risk faced by changes in swap spreads. Using data from the
US, UK, Germany, and Japan, we find that the risk faced from large
spread widenings and tightenings is grossly underestimated. Estimation
of swap spread risk is dramatically improved when the severity of the
fat tails is measured and incorporated into current estimation
techniques
