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Default Swaps (default + swap)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Kinds of Default Swaps

  • credit default swap
    		•

    Selected Abstracts

    Credit Default Swaps and the Stability of the Banking Sector,

    INTERNATIONAL REVIEW OF FINANCE, Issue 1 2010
    FRANK HEYDE
    ABSTRACT This paper considers credit default swaps (CDSs) used for the transfer of credit risk within the banking sector. The banks' motive to conclude these CDS contracts is to improve the diversification of their credit risk. It is shown that these CDSs reduce the stability of the banking sector in a recession. However, during a boom or in periods of moderate economic up- or downturn, they may reduce this stability. The main reasons behind these negative impacts are firstly, that banks are induced to increase their investment in an illiquid, risky credit portfolio, and secondly, that these CDSs may create a possible channel of contagion. [source]

    The behavior of emerging market sovereigns' credit default swap premiums and bond yield spreads

    INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 1 2010
    Michael Adler
    Abstract We test whether credit risk for Emerging Market Sovereigns is priced equally in the credit default swap (CDS) and bond markets. The parity relationship between CDS premiums and bond yield spreads (BYS), that was tested and largely confirmed in the literature, is mostly rejected. Prices below par can result in positive basis, i.e. CDS premiums that are greater than BYS and vice versa. To adjust for the non-par price, we construct the BYS implied by the term structure of CDS premiums for various maturities. We are able to restore the parity relation and confirm the equivalence of credit risk pricing in the CDS and bond markets for many countries that have bonds with non-par prices and time varying credit quality. We detect non-parity even after the adjustment mainly in countries in Latin America, where the bases are larger than the bid,ask spreads in the market. We also find that the repo rates of bonds decrease around episodes of credit quality deterioration, which helps the basis remain positive. Copyright © 2009 John Wiley & Sons, Ltd. [source]

    Back to the future: Futures margins in a future credit default swap index futures market

    THE JOURNAL OF FUTURES MARKETS, Issue 1 2007
    Hans N. E. Byström
    The introduction of exchange-traded credit default swap (CDS) index futures is eminent and this development in the credit market is the subject of this article. A theoretically appealing and practically implementable approach to computing accurate futures margins based on extreme value theory is suggested. The approach is then exemplified with a study of the increasingly popular iTraxx Europe CDS index market. Although this market is not organized through an exchange and is not a futures market, the empirical results together with an arbitrage argument nonetheless suggest margin levels in a future exchange-traded CDS index futures market computed using extreme value theory to be superior to those computed using the traditional normal distribution or the actual historical distribution. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:85,104, 2007 [source]

    Measuring and Optimizing Portfolio Credit Risk: A Copula-based Approach,

    ECONOMIC NOTES, Issue 3 2004
    Annalisa Di Clemente
    In this work, we present a methodology for measuring and optimizing the credit risk of a loan portfolio taking into account the non-normality of the credit loss distribution. In particular, we aim at modelling accurately joint default events for credit assets. In order to achieve this goal, we build the loss distribution of the loan portfolio by Monte Carlo simulation. The times until default of each obligor in portfolio are simulated following a copula-based approach. In particular, we study four different types of dependence structure for the credit assets in portfolio: the Gaussian copula, the Student's t-copula, the grouped t-copula and the Clayton n-copula (or Cook,Johnson copula). Our aim is to assess the impact of each type of copula on the value of different portfolio risk measures, such as expected loss, maximum loss, credit value at risk and expected shortfall. In addition, we want to verify whether and how the optimal portfolio composition may change utilizing various types of copula for describing the default dependence structure. In order to optimize portfolio credit risk, we minimize the conditional value at risk, a risk measure both relevant and tractable, by solving a simple linear programming problem subject to the traditional constraints of balance, portfolio expected return and trading. The outcomes, in terms of optimal portfolio compositions, obtained assuming different default dependence structures are compared with each other. The solution of the risk minimization problem may suggest us how to restructure the inefficient loan portfolios in order to obtain their best risk/return profile. In the absence of a developed secondary market for loans, we may follow the investment strategies indicated by the solution vector by utilizing credit default swaps. [source]

    Credit Default Swaps and the Stability of the Banking Sector,

    INTERNATIONAL REVIEW OF FINANCE, Issue 1 2010
    FRANK HEYDE
    ABSTRACT This paper considers credit default swaps (CDSs) used for the transfer of credit risk within the banking sector. The banks' motive to conclude these CDS contracts is to improve the diversification of their credit risk. It is shown that these CDSs reduce the stability of the banking sector in a recession. However, during a boom or in periods of moderate economic up- or downturn, they may reduce this stability. The main reasons behind these negative impacts are firstly, that banks are induced to increase their investment in an illiquid, risky credit portfolio, and secondly, that these CDSs may create a possible channel of contagion. [source]

    Copula sensitivity in collateralized debt obligations and basket default swaps

    THE JOURNAL OF FUTURES MARKETS, Issue 1 2004
    Davide Meneguzzo
    This article empirically faces the lively debate over the choice of an appropriate copula function to be used to price and risk monitor some credit derivatives products. We consider the explicit pricing of collateralized debt obligations and basket default swaps, and empirically examine these credit derivatives within the copula framework. The results support in particular the choice of the T-copula because of its greater flexibility in capturing the tail dependence. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:37,70, 2004 [source]

    Explaining credit default swap premia

    THE JOURNAL OF FUTURES MARKETS, Issue 1 2004
    Christoph Benkert
    This article proposes a simple approach for explaining credit default swap premia. Specifically, it investigates the effects of historical and option-implied equity volatility on credit default swap premia, thus extending an idea proposed by Campbell and Taksler (in press) in the context of corporate bond yields. Using panel data of credit default swaps on 120 international firms from 1999 to mid-2002, it becomes evident that option-implied volatility is a more important factor in explaining variation in credit default swap premia than historical volatility. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:71,92, 2004 [source]