The Pricing Of Credit Default Swaps During Distress
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The Pricing Of Credit Default Swaps During Distress
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Author : Jochen R. Andritzky
language : en
Publisher: International Monetary Fund
Release Date : 2006-11
The Pricing Of Credit Default Swaps During Distress written by Jochen R. Andritzky and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006-11 with Business & Economics categories.
Credit default swaps (CDS) provide the buyer with insurance against certain types of credit events by entitling him to exchange any of the bonds permitted as deliverable against their par value. Unlike bonds, whose risk spreads are assumed to be the product of default risk and loss rate, CDS are par instruments, and their spreads reflect the partial recovery of the delivered bond's face value. This paper addresses the implications of the difference between bond and CDS spreads and shows the extent to which the recovery assumption matters for determining CDS spreads. A no-arbitrage argument is applied to extract recovery rates from CDS and bond markets, using data from Brazil's distress in 2002-03. Results are related to the observation that preemptive restructurings are now more common than straight defaults in sovereign bond markets and that this leads to a decoupling of CDS and bond spreads.
Imf Working Papers
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Author : Jochen R. Andritzky
language : en
Publisher:
Release Date : 2006
Imf Working Papers written by Jochen R. Andritzky and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with Electronic books categories.
Credit Default Swaps
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Author : Christopher L. Culp
language : en
Publisher: Springer
Release Date : 2018-07-12
Credit Default Swaps written by Christopher L. Culp and has been published by Springer this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018-07-12 with Business & Economics categories.
This book, unique in its composition, reviews the academic empirical literature on how CDSs actually work in practice, including during distressed times of market crises. It also discusses the mechanics of single-name and index CDSs, the theoretical costs and benefits of CDSs, as well as comprehensively summarizes the empirical evidence on important aspects of these instruments of risk transfer. Full-time academics, researchers at financial institutions, and students will benefit from the dispassionate and comprehensive summary of the academic literature; they can read this book instead of identifying, collecting, and reading the hundreds of academic articles on the important subject of credit risk transfer using derivatives and benefit from the synthesis of the literature provided.
Are Credit Default Swaps Spreads High In Emerging Markets
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Author : Mr.Manmohan Singh
language : en
Publisher: International Monetary Fund
Release Date : 2003-12-01
Are Credit Default Swaps Spreads High In Emerging Markets written by Mr.Manmohan Singh and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003-12-01 with Business & Economics categories.
In times of distress when a country loses access to markets, there is evidence that credit default swap (CDS) spreads are a leading indicator for sovereign risk than the EMBI+ sub-index for the country. However, it is not easy to discern the variables that determine the level of CDS spreads in Emerging Markets (EM); traders only quote the CDS spreads and not the inputs that are required to calculate such spreads. This note provides some evidence from Argentina and Brazil that reveals inconsistency between theory and practice in pricing CDS spreads in EM. This note suggests an alternate methodology that links CTD (cheapest-to-deliver) bonds to recovery values assumed in CDS contracts. Furthermore, special features that pertain to CDS contracts (repo specialness, short squeezes by central banks) may also magnify the financial distress of a sovereign.
Anticipating Credit Events Using Credit Default Swaps With An Application To Sovereign Debt Crises
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Author : Mr.Jorge A. Chan-Lau
language : en
Publisher: International Monetary Fund
Release Date : 2003-05-01
Anticipating Credit Events Using Credit Default Swaps With An Application To Sovereign Debt Crises written by Mr.Jorge A. Chan-Lau and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003-05-01 with Business & Economics categories.
In reduced-form pricing models, it is usual to assume a fixed recovery rate to obtain the probability of default from credit default swap prices. An alternative credit risk measure is proposed here: the maximum recovery rate compatible with observed prices. The analysis of the recent debt crisis in Argentina using this methodology shows that the correlation between the maximum recovery rate and implied default probabilities turns negative in advance of the credit event realization. This empirical finding suggests that the maximum recovery rate can be used for constructing early warning indicators of financial distress.
Anticipating Credit Events Using Credit Default Swaps
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Author : Jorge A. Chan-Lau
language : en
Publisher:
Release Date : 2008
Anticipating Credit Events Using Credit Default Swaps written by Jorge A. Chan-Lau and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
In reduced-form pricing models, it is usual to assume a fixed recovery rate to obtain the probability of default from credit default swap prices. An alternative credit risk measure is proposed here: the maximum recovery rate compatible with observed prices. The analysis of the recent debt crisis in Argentina using this methodology shows that the correlation between the maximum recovery rate and implied default probabilities turns negative in advance of the credit event realization. This empirical finding suggests that the maximum recovery rate can be used for constructing early warning indicators of financial distress.
The Fundamental Determinants Of Credit Default Risk For European Large Complex Financial Institutions
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Author : Jiri Podpiera
language : en
Publisher: International Monetary Fund
Release Date : 2010-06-01
The Fundamental Determinants Of Credit Default Risk For European Large Complex Financial Institutions written by Jiri Podpiera and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010-06-01 with Business & Economics categories.
This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.
The Use And Abuse Of Cds Spreads During Distress
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Author : Carolyne Spackman
language : en
Publisher: INTERNATIONAL MONETARY FUND
Release Date : 2009-03-01
The Use And Abuse Of Cds Spreads During Distress written by Carolyne Spackman and has been published by INTERNATIONAL MONETARY FUND this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009-03-01 with categories.
Credit Default Swap spreads have been used as a leading indicator of distress. Default probabilities can be extracted from CDS spreads, but during distress it is important to take account of the stochastic nature of recovery value. The recent episodes of Landbanski, WAMU and Lehman illustrate that using the industry-standard fixed recovery rate assumption gives default probabilities that are low relative to those extracted from stochastic recovery value as proxied by the cheapest-to-deliver bonds. Financial institutions using fixed rate recovery assumptions could have a false sense of security, and could be faced with outsized losses with potential knock-on effects for other institutions. To ensure effective oversight of financial institutions, and to monitor the stability of the global financial system especially during distress, the stochastic nature of recovery rates needs to be incorporated.
Overpricing In Emerging Market Credit Default Swap Contracts Some Evidence From Recent Distress Cases
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Author : Jochen R. Andritzky
language : en
Publisher: INTERNATIONAL MONETARY FUND
Release Date : 2005-06-01
Overpricing In Emerging Market Credit Default Swap Contracts Some Evidence From Recent Distress Cases written by Jochen R. Andritzky and has been published by INTERNATIONAL MONETARY FUND this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005-06-01 with Credit derivatives categories.
Since recent debt restructurings that constitute credit events have been more frequent than outright defaults, sovereign bond prices may not collapse during distress. In this case, the likely high recovery values after restructuring suggest that the cost of credit-default-swap (CDS) contracts to the buyer (as measured by CDS spreads) may be higher than warranted. We estimate the extent of such overpricing by using the cheapest-to-deliver (CTD) bond as a proxy for the recovery-value assumption.
Credit Default Swaps
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Author : Marti Subrahmanyam
language : en
Publisher: Now Publishers
Release Date : 2014-12-19
Credit Default Swaps written by Marti Subrahmanyam and has been published by Now Publishers this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014-12-19 with Business & Economics categories.
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.