Sovereign Debt Renegotiation and Credit Default Swaps
نویسندگان
چکیده
منابع مشابه
Sovereign Debt Renegotiation and Credit Default Swaps
A credit default swap (CDS) contract provides insurance against default. After a country defaults, the country and its lenders usually negotiate over the share of the defaulted debt to be repaid. This paper incorporates CDS contracts into a sovereign default model and demonstrates that the existence of a CDS market results in lower default probability, higher debt levels, and lower nancing cost...
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First passage models, where corporate assets undergo a random walk and default occurs if the assets fall below a threshold, provide an attractive framework for modeling the default process. Recently such models have been generalized to allow a fluctuating default threshold or equivalently a fluctuating total recovery fraction R. For a given company a particular type of debt has a recovery fract...
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Sovereign debt renegotiations take an average of nine years for bank loans but only one year for bonds. Our paper provides an explanation to this finding by highlighting one key difference between bank loans and bonds: bank debt is rarely traded, while bond debt is heavily traded on the secondary market. The secondary market plays a crucial information revelation role in shortening renegotiatio...
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Using sovereign CDS spreads and currency option data for Mexico and Brazil, we document that CDS spreads covary with both the currency option implied volatility and the slope of the implied volatility curve in moneyness. We propose a joint valuation framework, in which currency return variance and sovereign default intensity follow a bivariate diffusion with contemporaneous correlation. Estimat...
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ژورنال
عنوان ژورنال: SSRN Electronic Journal
سال: 2014
ISSN: 1556-5068
DOI: 10.2139/ssrn.2533714