This paper documents an increase in the correlation of credit default swap (CDS) spread changes during the credit crisis and investigates the source of that increase. One possible explanation is that correlations increased because fundamental values became more correlated during the crisis. Alternatively, correlations may have increased because of contagion, rather than because of an increase i...

We consider counterparty risk for Credit Default Swaps (CDS) in presence of correlation between default of the counterparty and default of the CDS reference credit. Our approach is innovative in that, besides default correlation, which was taken into account in earlier approaches, we also model credit spread volatility. Stochastic intensity models are adopted for the default events, and default...

We find that managers receive more risk-taking incentives in their compensation packages once firms are referenced by credit default swap (CDS) trading, particularly when institutional ownership is high and financial distress. These findings provide suggestive evidence boards offer pay encourage greater risk taking to take advantage of the reduced creditor monitoring after CDS introduction. Fur...

Market prices of corporate bond spreads and of credit default swap (CDS) rates do not match each other. In this paper, we argue that the liquidity premium, the cheapest-to-deliver (CTD) option and actual market segmentation explain the pricing differences. Using the European transaction data from Reuters and Bloomberg, we estimate the liquidity premium that is timevarying and firm-specific. We ...

Risk-neutral default probabilities can be implied from credit swap (CDS) market quotes. In practice, mid CDS quotes are used as inputs, their risk-neutral counterparts not observable. We show how to imply bid and ask directly by means of formulating the calibration problem within conic finance framework. Assuming distribution time driven a Poisson process we prove, under mild liquidity-related ...

We assess the efficiency of sovereign credit default swap (CDS) market by investigating how CDS spreads react to macroeconomic news announcements. Contrary vast majority existing literature, one our main findings supports hypothesis that announcements reduce uncertainty and, thus, both better- and worse-than-expected lower prices during sample period. In addition, we find respond differently fo...

Using a comprehensive dataset of mutual funds’ quarterly holdings of credit default swap (CDS) contracts during 2007-2011, we analyze the motives for and consequences of mutual funds’ participation in the CDS market preand post-financial crisis. Consistent with theoretical work, funds resort to CDS (especially selling) when they face unpredictable liquidity needs and when the CDS securities are...

This paper makes an analysis on a default swap option that an investment bank in Japan produced on the credit-risk of a convertible bond issued by a third company C. In this default swap option, a protection buyer A against a default of C owns the right of starting an interest swap between the buyer and a protection seller B when a credit event happens. When B starts the swap after a default, t...

The credit default swap has become well-known as one of the causes of the 2007-2010 credit crisis but more research is vitally needed to analyze and define its impact more precisely and help the financial market transparency. This paper uses cartesian genetic programming as a discovery tool for finding the relationship between credit default swap spreads and debts and studying the arbitrage cha...

In this paper, we study the pricing of credit risky securities under a threefirms contagion model. The interacting default intensities not only depend on the defaults of other firms in the system, but also depend on the default-free interest rate which follows jump diffusion stochastic differential equation, which extends the previous three-firms models (see R.A. Jarrow and F.Yu (2001), S.Y.Leu...