Do Correlated Defaults Matter for CDS Premia? PDF Download

Author: Christian Koziol
Publisher:
ISBN: 9783957290540
Category :
Languages : en
Pages : 40

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Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Author: Marti Subrahmanyam
Publisher: Now Publishers
ISBN: 9781601989000
Category : Business & Economics
Languages : en
Pages : 150

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Credit Default Swaps: A Survey is the most comprehensive review of all major research domains involving credit default swaps (CDS). CDS have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly since the credit crisis of 2007-2009. The authors review the extant literature on CDS that has accumulated over the past two decades and divide the survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles, structural, and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the bond and equity markets, with an emphasis on market efficiency, price discovery, information flow, and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and corporate governance. The sixth section analyzes how CDS impact the economic incentives of financial intermediaries. The seventh section reviews the growing literature on sovereign CDS and highlights the major differences between the sovereign and corporate CDS markets. The eighth section discusses CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. The authors close with our suggestions for promising future research directions on CDS contracts and markets.

Author: Ida Buus
Publisher:
ISBN:
Category :
Languages : en
Pages : 114

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The period after the beginning of the crisis than before. This indicates that the relationship between CDS spreads and equity prices is stronger under deteriorating market conditions. Furthermore we examine how the credit rating of the underlying entity affects the relationship. We do this by splitting our data in investment grade and high yield. The influence of equity prices on CDS spreads is stronger for the high yield model than the investment grade model. This indicates that the relationship between CDS spreads and equity prices is stronger the lower the credit rating of the underlying entity. At last we examine how the size of the CDS spread effects the relationship. We do this by splitting our data into quartiles. We split the data for index, before and after the beginning of the crisis, high yield, and investment grade. We find that when comparing the quartiles against each otherthe influence of equity prices on CDS spreads is strongest for quartile 4, second strongest for quartile 3, third strongest for quartile 2 and least strongest for quartile 1. Moreover when comparing the quartile models with their respective overall index we find that quartile 3 and 4 are stronger models than the overall model except for the models for high yield and investment grade. The overall conclusion is that there is a negative relationship between CDS spreads and equity prices and that equity prices lead CDS spreads.

Author: Norbert Jobst
Publisher:
ISBN:
Category :
Languages : en
Pages : 32

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Equity Default Swaps (EDS) - contracts that trigger a payment when the underlying equity price falls below a predetermined level - have attracted much attention recently because of their similarities to credit default swaps (CDS) on the one hand, and American digital puts on the other. Particular interest has been received by Collateralized Debt Obligations (CDOs) referencing a portfolio of EDSs, which not only requires the univariate assessment of the risks inherent in EDSs, but also the analysis of dependencies between EDSs (and other asset classes). In this paper, we specifically address correlation or dependency aspects of EDSs, by applying techniques developed for estimating default correlation. Based on Standard amp; Poor's CreditPro and Compustat (North America) databases, extensive empirical research is presented. Amongst the main findings are that EDS correlations for standard strikes/barriers of 30% are significantly higher than default correlations, and increase in barrier level, but only for strikes above 50%. This indicates a barrier dependent correlation concept.

Author: Nicola Gennaioli
Publisher: International Monetary Fund
ISBN: 1498391990
Category : Business & Economics
Languages : en
Pages : 53

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We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.

Author: Georg Bol
Publisher: Springer Science & Business Media
ISBN: 3790820504
Category : Business & Economics
Languages : en
Pages : 286

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New developments in assessing and managing risk are discussed in this volume. Addressing both practitioners in the banking sector and research institutions, the book provides a manifold view on the most-discussed topics in finance. Among the subjects treated are important issues such as: risk measures and allocation of risks, factor modeling, risk premia in the hedge funds industry and credit risk management. The volume provides an overview of recent developments as well as future trends in the area of risk assessment.

Author: Roberto Blanco Escolar
Publisher:
ISBN:
Category :
Languages : en
Pages : 44

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This paper analyses the behaviour of credit default swaps (CDS) for a sample of firms and finds support for the theoretical equivalence of CDS prices and credit spreads. When this is violated, the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. The paper shows that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short run. Both markets equally reflect these factors in the long run, and this is primarily brought about by bond market adjustment.

Author: Roberto Blanco
Publisher:
ISBN:
Category : Bonds
Languages : en
Pages : 44

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"In this paper the behaviour of credit default swaps (CDS) are analysed for a sample of firms and support found for the theoretical equivalence of CDS prices and credit spreads. When this is violated, the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. It is shown that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short run. Both markets equally reflect these factors in the long run, and this is primarily brought about by bond market adjustment"--Bank of England web site

Author: Min Qi
Publisher:
ISBN:
Category :
Languages : en
Pages : 48

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We provide the first empirical analysis on the effects of credit default swaps (CDS) on corporate distress resolution with a focus on debt recovery rate. CDS contracts are settled shortly after the occurrence of credit events such as restructuring or bankruptcy filings and, presumably, should cease to be relevant after the settlements. However, we find that the ultimate debt recovery rates, which are determined in the final resolution plan and long after the CDS settlements, are higher for the bankrupt firms with CDS contracts before bankruptcy filings. This CDS effect on recovery rates is more pronounced for bonds than for loans. The overall evidence is consistent with the view that CDS trigger earlier bankruptcy filings, leaving more valuable assets for bondholders in the bankrupt entities.