Why the Lack of the 'Right, But Not the Obligation' to Exercise a Credit Default Swap Upon the Occurrence of a Credit Event Does Not Prevent the Characterization of a Credit Default Swap as an Option

This article examines the informational content of credit default swap (CDS) net notional for future stock and CDS prices. Using the information on CDS contracts registered in DTCC, a clearinghouse, I construct CDS-to-debt ratios from net notional, that is, the sum of net positive positions of all market participants, and total outstanding debt issued by the reference entity. Unlike the ratio using the sum of all outstanding CDS contracts, this ratio directly indicates how much of debt is insured with CDS and therefore, is a natural measure of investors’ concern on a credit event of the reference entity. Empirically, I find crosssectional evidence that the current increase in CDS-to-debt ratios can predict a decrease in stock prices and an increase in CDS premia of the reference firms in the next week. Greater predictability for firms with investment grade credit ratings or low CDS-to-debt ratios suggests that investors pay more attention to firms in good credit conditions than those regarded as junk or already insured considerably with CDS.

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A Simulation Model for Pricing the Spread in a Credit Default Swap: Application and Analysis#

SDMIMD Journal of Management ◽

10.18311/sdmimd/2018/20024 ◽

2018 ◽

Vol 9 (2) ◽

pp. 9

Author(s):

Madhvi Sethi ◽

Parthiv Thakkar ◽

Zahid M. Jamal

Keyword(s):

Simulation Model ◽

Credit Ratings ◽

Credit Default Swap ◽

Pricing Model ◽

Underlying Asset ◽

True Value ◽

Credit Default ◽

Default Swap ◽

Credit Event

This paper explores pricing the contract of a Credit Default Swap (CDS) using a simulation model. It attempts to determine the spread value which is a periodic payment to be made by the protection buyer. It also helps in identifying the factors that should be taken into account to determine the true value of the payment which would hedge the risk in case of a credit event by the issuer of the underlying asset. The paper uses the Hull and White pricing model for creating the simulation model. This model is then applied to analyse CDSs of countries having different credit ratings. The paper using the model analyses the actual and estimated spread of the different countries and discusses the possible reasons for the same.<ins cite="mailto:Windows%20User" datetime="2018-01-07T00:55"> </ins>

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Limiting dependence structures for tail events, with applications to credit derivatives

Journal of Applied Probability ◽

10.1239/jap/1152413742 ◽

2006 ◽

Vol 43 (2) ◽

pp. 563-586 ◽

Cited By ~ 30

Author(s):

Arthur Charpentier ◽

Alessandro Juri

Keyword(s):

Credit Derivatives ◽

Credit Default Swap ◽

Risk Area ◽

Invariance Properties ◽

Convergence Results ◽

Credit Default ◽

Default Swap ◽

Tail Events ◽

Dependence Structures

Dependence structures for bivariate extremal events are analyzed using particular types of copula. Weak convergence results for copulas along the lines of the Pickands-Balkema-de Haan theorem provide limiting dependence structures for bivariate tail events. A characterization of these limiting copulas is also provided by means of invariance properties. The results obtained are applied to the credit risk area, where, for intensity-based default models, stress scenario dependence structures for widely traded products such as credit default swap baskets or first-to-default contract types are proposed.

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How did the Greek credit event impact the credit default swap market?

Journal of Financial Stability ◽

10.1016/j.jfs.2016.10.009 ◽

2018 ◽

Vol 35 ◽

pp. 136-158 ◽

Cited By ~ 5

Author(s):

Grzegorz Hałaj ◽

Tuomas A. Peltonen ◽

Martin Scheicher

Keyword(s):

Credit Default Swap ◽

Credit Default ◽

Default Swap ◽

Credit Event

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High Yield Bonds

Debt Markets and Investments ◽

10.1093/oso/9780190877439.003.0031 ◽

2019 ◽

pp. 599-620

Author(s):

Byron C. Barnes ◽

Tony Calenda ◽

Elvis Rodriguez

Keyword(s):

Interest Rates ◽

Economic Activity ◽

Default Risk ◽

Credit Default Swap ◽

High Yield ◽

Credit Default ◽

Key Drivers ◽

Default Swap ◽

Investment Grade ◽

Credit Event

High yield bonds (HYBs) have become an integral part of the funding and investment landscape. HYBs are bonds rated below investment grade, indicating a potentially greater default risk and concomitant return. Although often associated with leveraged buyouts (LBOs), corporations also use HYBs to finance general corporate needs. The key drivers of HYB issuance include general economic activity, the number and size of transactions requiring financing, interest rates, and the availability of substitute financial products such as leveraged loans. Leveraged loans are another source of financing for issuers with a similar profile as HYB issuers. A key difference between HYBs and leveraged loans is that the covenants associated with a leveraged loan are typically more lender friendly. Similar to investment grade bonds, investors can purchase insurance to hedge a long HYB position against a credit event by using a credit default swap.

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Limiting dependence structures for tail events, with applications to credit derivatives

Journal of Applied Probability ◽

10.1017/s0021900200001832 ◽

2006 ◽

Vol 43 (02) ◽

pp. 563-586 ◽

Cited By ~ 2

Author(s):

Arthur Charpentier ◽

Alessandro Juri

Keyword(s):

Credit Derivatives ◽

Credit Default Swap ◽

Risk Area ◽

Invariance Properties ◽

Convergence Results ◽

Credit Default ◽

Default Swap ◽

Tail Events ◽

Dependence Structures

Dependence structures for bivariate extremal events are analyzed using particular types of copula. Weak convergence results for copulas along the lines of the Pickands-Balkema-de Haan theorem provide limiting dependence structures for bivariate tail events. A characterization of these limiting copulas is also provided by means of invariance properties. The results obtained are applied to the credit risk area, where, for intensity-based default models, stress scenario dependence structures for widely traded products such as credit default swap baskets or first-to-default contract types are proposed.

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