We examine the correlation in credit risk using credit default swap (CDS) data. We find that the observable risk factors at the firm, industry, and market levels and the macroeconomic variables cannot fully explain the correlation in CDS spread changes, leaving at least 30 percent of the correlation unaccounted for. This finding suggests that contagion is not only statistically but also economi...

In this paper, we investigate the determinants of credit default swap (CDS) spread for the Japanese market, which is one of the major CDS markets in the world. Our assessment of literature indicates that there is a lack of related empirical research using data from the Japanese market. By analyzing data from 2001 to 2004, the empirical results show that the theoretical determinants, including l...

a r t i c l e i n f o a b s t r a c t We theorize and confirm a new channel by means of which liquidity costs are embedded in CDS spreads. We show that credit default swap (CDS) spreads are directly related to equity market liquidity in the Merton [Merton, R.C., 1974. On the pricing of corporate debt: The risk structure of interest rates. J. Finance 29, 449–470] model via hedging. We confirm th...

In this work we derive an approximated no-arbitrage market valuation formula for Constant Maturity Credit Default Swaps (CMCDS). We move from the CDS options market model in Brigo (2004), and derive a formula for CMCDS that is the analogous of the formula for constant maturity swaps in the default free swap market under the LIBOR market model. A “convexity adjustment”-like correction is present...

In this paper, the author discusses the distribution of the jump-diffusion CIR model (JCIR) and its applications in credit risk. Applying the piecewise deterministic Markov process theory and martingale theory, we first obtain the closed forms of the Laplace transforms for the distribution of the jump-diffusion CIR model and its integrated process. Based on the obtained Laplace transforms, we d...

This paper aims to identify the predominant determinants of sovereign credit ratings in Indonesia and its peer countries from 2004 2019 by considering GDP per capita, official reserve, government debt, Current Account Balance, Credit Default Swap (CDS), Sovereign Rating used three major rating agencies. CDS is considered a newly proposed variable with predicting capacity as measure default. rat...

In this paper we develop structural first passage models (AT1P and SBTV) with time-varying volatility and characterized by high tractability, moving from the original work of Brigo and Tarenghi (2004, 2005) [19] [20] and Brigo and Morini (2006)[15]. The models can be calibrated exactly to credit spreads using efficient closed-form formulas for default probabilities. Default events are caused by...

In this paper a new credit risk model for credit derivatives is presented. The model is based upon the ‘Libor market’ modelling framework for default-free interest rates. We model effective default-free forward rates and effective forward credit spreads as lognormal diffusion processes, and recovery is modelled as a fraction of the par value of the defaulted claim. The newly introduced survival...

In this study, I analyze the effect of central clearing on credit default swap (CDS) market breadth, depth, and resiliency using a regression discontinuity design. find evidence for decrease in absolute bid–ask spreads spread an increase gross trading volume with beginning clearing. However, we observe positive effects CDS liquidity only contracts high fundamental risk. Further results indicate...