Corporate Payout Policy and Credit Risk: Evidence from Credit Default Swap Markets

2020 ◽  
Author(s):  
Chengzhu Sun ◽  
Shujing Wang ◽  
Chu Zhang
Keyword(s):  
Credit Risk ◽  
Financial Distress ◽  
Credit Default Swap ◽  
Payout Policy ◽  
Share Repurchases ◽  
Wealth Transfer ◽  
Financial Firms ◽  
Credit Default ◽  
Default Swap ◽  
Dividend Cuts

We examine whether and how payout policy affects credit risk using evidence from the credit default swap (CDS) market. CDS spreads increase substantially in response to announcements of dividend cuts, especially during recessions and among firms experiencing financial distress. CDS spreads also react more strongly to permanent and less anticipated dividend cuts. The size of the CDS reaction is more pronounced for financial firms, which are inherently more opaque. In contrast, CDS spreads react weakly to dividend raises and share repurchases. The results show that the information effect of dividend changes dominates the wealth-transfer effect. This paper was accepted by Kay Giesecke, finance.

What Drives Systemic State Credit Risk? Evidence from the State Credit Default Swap (CDS) Market

2019 ◽  
Vol 28 (4) ◽  
pp. 5-45
Author(s):  
Sheen Liu ◽  
Chunchi Wu ◽  
Chung-Ying Yeh ◽  
Woongsun Yoo
Keyword(s):  
Credit Risk ◽  
Credit Default Swap ◽  
The State ◽  
Credit Default ◽  
Default Swap

The Rise of Credit Default Swaps and Its Implications on Financial Stability

2018 ◽  
pp. 336-350
Author(s):  
Fatma Sezer Dural
Keyword(s):  
Credit Risk ◽  
Exponential Growth ◽  
Financial Stability ◽  
Credit Default Swap ◽  
Credit Default Swaps ◽  
Financial Instruments ◽  
Credit Crisis ◽  
Credit Default ◽  
Default Swap ◽  
The Stability

The credit default swap market has experienced an exponential growth in recent decades. Though the fırst credit default swap contract was negotiated in the mid-1990s, the market has enjoyed a surge of popularity beginning in 2003. By the end of June 2013, the outstanding amount reached 24.3 trillion dollars. It is mostly used to transfer or to hedge credit risk. Concurrently with the global credit crisis, several shortcomings in CDS markets have appeared. One of the obvious questions is whether they affect the stability of financial markets. In this context after broader exhibition of credit default swaps market, speculative use of CDS, inception of central counterparty, and transparency of CDS market is handled. As a conclusion, it is true that the CDS market still has some weaknesses, but it is no more prone to be destabilizing than other financial instruments. This is shown in this chapter.

Counterparty credit risk and the credit default swap market

2012 ◽  
Vol 103 (2) ◽  
pp. 280-293 ◽  
Author(s):  
Navneet Arora ◽  
Priyank Gandhi ◽  
Francis A. Longstaff
Keyword(s):  
Credit Risk ◽  
Credit Default Swap ◽  
Credit Default ◽  
Counterparty Credit Risk ◽  
Default Swap

scholarly journals THE INTERACTIONS AND TRADE-OFFS OF SOVEREIGN CREDIT DEFAULT SWAP (CDS) AND BOND SPREADS IN A DYNAMIC CONTEXT

2019 ◽  
Vol 20 (3) ◽  
pp. 466-488
Author(s):  
Ioannis A. Tampakoudis ◽  
Andrius Tamošiūnas ◽  
Demetres N. Subeniotis ◽  
Ioannis G. Kroustalis
Keyword(s):  
Credit Risk ◽  
Price Discovery ◽  
Credit Default Swap ◽  
Bond Market ◽  
Discovery Process ◽  
Sovereign Credit ◽  
Credit Default ◽  
Default Swap ◽  
Bond Spreads ◽  
Price Discovery Process

This study provides a dynamic analysis of the lead-lag relationship between sovereign Credit Default Swap (CDS) and bond spreads of the highly indebted southern European countries, considering an extensive time sample from the period before the global financial crisis to the latest developments of the sovereign indebtedness in the euro area. We employ an integrated price discovery methodology on a rolling sample, with the intention to shed light on whether the CDS spreads can trigger rises in bond spreads, and the relative efficiency of credit risk pricing in the CDS and bond markets. In addition, we attempt to depict the evolution of the price discovery process regarding the direction of influence from one market to the other. The rolling window analysis verifies that the price discovery process evolves over time, presenting frequent alternations concerning the leading market. We find that during periods of economic turbulence the CDS market leads the bond market in price discovery, incorporating the new information about sovereign credit risk faster and more efficiently than the bond market does. This regularity should be seriously considered by private and public participants as they make investment and funding decisions. Therefore, the motivation of our paper is to identify the dominant market in terms of price discovery during a period of economic turmoil and, thus, to provide insights for decision making to investment bodies and central governments.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

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