The Real Effects of Credit Default Swaps
نویسندگان
چکیده
We examine the effect of introducing credit default swaps (CDSs) on firms’ investment and financing policies. Our model allows for dynamic investment and dynamic financing using equity and debt, and debt holders can trade in the CDS market. After calibrating the model, we compare an economy with a CDS market to an economy without one. The model contains both positive and negative effects of CDS contracts. While they reduce the risk of strategic default, they also increase the probability of bankruptcy. The first effect dominates, which leads to higher leverage, investment, and firm value. The effect on firm value is strongest for small and high growth firms.
منابع مشابه
An Application of Genetic Network Programming Model for Pricing of Basket Default Swaps (BDS)
The credit derivatives market has experienced remarkable growth over the past decade. As such, there is a growing interest in tools for pricing of the most prominent credit derivative, the credit default swap (CDS). In this paper, we propose a heuristic algorithm for pricing of basket default swaps (BDS). For this purpose, genetic network programming (GNP), which is one of the recent evolutiona...
متن کاملComparing Prediction Power of Artificial Neural Networks Compound Models in Predicting Credit Default Swap Prices through Black–Scholes–Merton Model
Default risk is one of the most important types of risks, and credit default swap (CDS) is one of the most effective financial instruments to cover such risks. The lack of these instruments may reduce investment attraction, particularly for international investors, and impose potential losses on the economy of the countries lacking such financial instruments, among them, Iran. After the 2007 fi...
متن کاملThe Lévy Libor model with default risk
In this paper we present a model for the dynamic evolution of the term structure of default-free and defaultable interest rates. The model is set in the Libor market model framework but in contrast to the classical diffusion-driven setup, its dynamics are driven by a time-inhomogeneous Lévy process which allows us to better capture the real-world dynamics of credit spreads. We present necessary...
متن کاملPricing and Trading Credit Default Swaps in a Hazard Process Model
In the paper we study dynamics of the arbitrage prices of credit default swaps within a hazard process model of credit risk. We derive these dynamics without postulating that the immersion property is satisfied between some relevant filtrations. These results are then applied so to study the problem of replication of general defaultable claims, including some basket claims, by means of dynamic ...
متن کاملPricing Credit Default Swaps Under Default Correlations and Counterparty Risk ∗
In this paper, we develop a generalized affine model to characterize correlated credit risk of multi-firms. When valuing credit derivatives, this new approach allows to incorporate correlative market and credit risk, interdependent default risk structure and counterparty risk into consideration. We have demonstrated our affine model not only combines the existing structural models and intensity...
متن کامل