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...

Using 5-year credit default swap (CDS) contracts on 1,247 U.S. firms from 2003 2011, we show a 3-month formation and 1-month holding period CDS momentum strategy yields 52 bps per month. By incorporating past CDS return signals, we further show traditional stock momentum strategies avoid abrupt losses during the crisis period and improve their performance by net 104 bps per month. Both within C...

This paper presents a new structural framework for multidimensional default risk. We define the time of default as the first time the log-return of the stock price of a firm jumps below a (possibly nonconstant) default level. When stock prices are exponential Lévy, this framework is equivalent to a reduced form approach, where the intensity process is parametrized by a Lévy measure. The depende...

The valuation of counterparty risk for single name credit derivatives requires the computation of joint distributions of default times of two default-prone entities. For a Merton-type model, we derive some formulas for these joint distributions. As an application, closed formulas for coun-terparty risk on a CDS or for a first-to-default swap on two underlyings are obtained.

This paper finds a strong relation between corporate credit default swap (CDS) information and higher moments of equity returns, as predicted by structural models. We use CDS spreads to measure the level of credit risk and to estimate credit market-implied risk premia. The results document that implied volatilities of equity options as well as ex-ante variance and skewness increase with CDS spr...

We present a network model approach to studying systemic risk for the Credit Default Swap (CDS) market. The network model of the CDS market shows how certain parameters of a network can affect the expected loss of the system relative to the initial loss caused by a default. This model also demonstrates how a clearinghouse stymies loss propagation and highlights the usefulness of important data ...

significant aspect of the evolution of credit markets has been the development of credit-risk transfer through the use of derivatives.1 Globally, one of the fastest-growing derivative products is the credit default swap (CDS). This article describes the basic mechanics of a CDS, assesses the impact of CDSs on market efficiency, and considers the implications of the growing market for CDSs for f...

This paper estimates the price for restructuring risk in the U.S. corporate bond market during 1999-2005. Comparing quotes from default swap (CDS) contracts with a restructuring event and without, we find that the average premium for restructuring risk represents 6% to 8% of the swap rate without restructuring. We show that the restructuring premium depends on firmspecific balance-sheet and mac...

We propose a nonlinear lter to estimate the time-varying instantaneous default risk from the term structure of credit default swap (CDS) spreads. Based on the numerical solution of the Fokker-Planck equation (FPE) using a meshfree interpolation method, the lter performs a joint estimation of default intensities and CIR model parameters. As the FPE can account for nonlinear functions and nonGaus...