Problems with Using CDS to Infer Default Probabilities
نویسنده
چکیده
Using credit default swaps (CDS) to imply a rms or sovereigns default probability is laden with di¢ culties, making the resulting estimate unreliable. This paper exposes these di¢ culties using a simple analogy to life insurance premiums. An analogy is used because the logic is more easily understood in this context. The di¢ culties are unraveling the impact of risk premium, counterparty risk, market frictions, and strategic trading. Given a well understood alternative to implied CDS default probabilities is available, actuarial based default probabilities, banking regulations and risk management decisions should not be based on CDS implied default probabilities.
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تاریخ انتشار 2012