Essays On Credit Default Swaps.

Overview

This paper addresses several aspects of Credit Default Swaps (CDSs). In the first chapter we provide a survey of the CDS market and develop a discussion on various aspects concerning the product. We survey its early emergence and review its history, describe the various types of credit derivative products, discuss early challenges it faced and how standardization contributed to solving them. We provide market data and estimates, from volumes of trade to active sectors, offering a detailed breakdown by specific ...
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Overview

This paper addresses several aspects of Credit Default Swaps (CDSs). In the first chapter we provide a survey of the CDS market and develop a discussion on various aspects concerning the product. We survey its early emergence and review its history, describe the various types of credit derivative products, discuss early challenges it faced and how standardization contributed to solving them. We provide market data and estimates, from volumes of trade to active sectors, offering a detailed breakdown by specific segments. We discuss benefits and risks that CDS trading introduced into the market, focusing, among other issues, on counterparty risk and lack of systemic risk regulation. In the second chapter we explore the parity between CDS premiums and bond spreads for emerging market sovereign entities. Previous studies found that this parity holds between bonds and CDSs for US corporate debt. We find that this parity does not hold for Emerging Markets sovereign debt. In order to explain the pricing deviations we focus on two frictions, liquidity and counterparty risk. First, we present a model where the two market frictions account for the deviations in prices. Then, our empirical results strongly support the relevance of these two factors to the pricing of CDS contracts. We mange to restore much of the theoretical predictions of a zero basis spread once we account for liquidity effects. In the final chapter we address two aspects of CDS trading patterns in light of the credit events connected to the recent financial crisis, focusing on the market for sovereign CDS contracts. First, we explore the relation between CDS prices and macroeconomic fundamentals. More specifically, we examine whether debt indicators of a country, such as its ratio of debt to GDP and its changes in leverage, can account for the extraordinary sharp increases in sovereign CDS spreads during the current credit crisis. Second, we address the predictability power embedded in CDS markets and whether CDS markets are a leading indicator in times of crisis compared to stock indices.
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Product Details

  • ISBN-13: 9781244087361
  • Publisher: BiblioLabsII
  • Publication date: 9/11/2011
  • Pages: 178
  • Product dimensions: 7.44 (w) x 9.69 (h) x 0.38 (d)

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