Credit Default Swap

his paper is motivated by empirical evidence illustrating the non-Gaussian nature of financial returns, (Jondeau et al 2007) and analyses extreme value theory, (EVT) as a proposed improvement (Embrechts et al., 2005) for risk estimation techniques.Credit default swaps, (CDS’s) are analysed due to their increasing important to financial stability (European Union, 2009) and due to the lack of quantitative univariate risk analysis of this market. EVT is generally applied to currency, equity and bond markets, (Assaf, 2009). Whereas the majority of quantitative analysis of the CDS market has focused on multivariate functions, analysing the dependency of CDS market returns and other asset returns, (Chen et al., 2008). Equity and bond samples are used here as a comparison to the CDS market returns.The findings are divided into three parts. The first part focuses on the general characteristics of the three asset classes, CDS’s, equities and bonds, noting the non-normality of the distributio...

In this paper, we address the crucial problems of parameters estimation of Collateralized Debt Obligation (CDO). We present a methodology for fair spread estimation of reconstituted (CDO) from European market data. A fundamental part of the pricing framework is the estimation of default probabilities and the structure of dependency. We present a copula based simulation procedure for pricing CDO and

Sind die so genannten Leerverkäufe Mitverursacher der Finanzkrise und sollten deshalb Wetten auf sinkende Kurse verboten werden? Andre Horovitz, Financial Risk Fitness GmbH, verdeutlicht in seinem Beitrag, dass auch Leerverkäufe und »leer geschlossene« CDS für Unternehmen sinnvoll sein können, ohne eine »Zockerabsicht« unterstellen zu müssen, spricht sich aber für eine nötige Regulierung der Finanzbranche aus. Martin Schütte, Universität München, weist

Note: The Discussion Papers in this series are prepared by members of the Department of Economics, University of Essex, for private circulation to interested readers. They often represent preliminary reports on work in progress and should therefore be neither quoted nor referred to in published work without the written consent of the author. 1

Global growth momentum accelerated during the second and third quarters of 2013, while many downside risks lingered in the background. Strengthening of global growth momentum will help developing East Asia maintain a growth rate in excess of 7 percent, retaining its status as the global growth leader. Domestic demand, which has been the main driver of growth in the East Asia and Pacific (EAP) region in the post-global financial crisis period, is slowing. The decision by the United States (U.S.) Federal Reserve to delay tapering of quantitative easing has restored capital flows to emerging markets, giving the authorities a second opportunity to take measures to lower risks from future volatility. As the global growth cycle undergoes change, adjustments to fiscal and monetary policy are warranted in many EAP countries. With growth running at or above potential for most countries in the region, progress at upgrading growth and reducing poverty depends crucially on structural reforms. While the balance of risks to base case regional forecast lies on the downside, several upside risks have recently emerged. The three immediate headline risks include a less orderly tapering of the U.S.'s unconventional monetary policies, prolonged fiscal deadlock in the U.S., and a sharper than expected slowdown of the Chinese economy. In this context, the report is divided into following three parts: part one is recent developments and outlook; part two is selected emerging issues; and part three is the medium-term development agenda. This report includes a special section focusing on two emerging regional issues: the sustainability of China's investment- and credit-intensive growth model, and the regional implications of any future tapering of quantitative easing in the United States.

1. Introduzione La nostra rivista ha offerto e continua ad offrire contributi di analisi e riflessione sulla crisi, che negli ultimi quattro anni ha continuamente sviluppato e modificato le proprie caratteristiche, giorno dopo giorno. Proprio la natura complessa, multidimensionale della crisi rende utile un tentativo, sia pure parziale, di individuare i vari elementi che intervengono nella sua evoluzione, utilizzando i contributi fin qui pubblicati (inclusi quelli che appaiono nel numero di settembre 2011 della consorella PSL Quarterly Review). La crisi e nata nella finanza e ha avuto ripercussioni sui conti pubblici e sull’economia reale. Nata negli Stati Uniti, si e estesa in tutto il mondo ma con modalita e intensita diverse nelle diverse aree geografiche e nei diversi paesi. L’urgenza della situazione ha determinato in alcuni momenti significative reazioni di politica economica, in particolare politiche di espansione della liquidita, che hanno in genere fatto fronte al problema ...

Summary: The Dodd-Frank Wall Street Reform and Consumer Protection Act: What Caused the Financial Crisis and Will Dodd-Frank Succeed in Preventing Future Crises? We are still experiencing the devastating impact of the financial crisis which came to a head on September 18, 2008 when Secretary Paulson told Congressional leaders that “[u]nless you act, the financial system of this country and the world will melt down in a matter of days.” To prevent future crises of this magnitude, last year Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. However, this year, legislation has already been introduced to repeal this Act. In view of the gravity of the present financial crisis, it is critical to understand the causes of the financial crisis and the extent to which Dodd-Frank will prevent future crises. This article is a comprehensive analysis of both issues. This article demonstrates it was the “big banks,” by funding the subprime lenders, buying their mortgag...

Executive Summary: Credit default swaps (CDS) which constitute up to 98% of credit derivatives have had a unique, endemic and pernicious role to play in the current financial crisis. However, there are few in depth empirical studies of the financial network interconnections among banks and between banks and nonbanks involved as CDS protection buyers and protection sellers. The ongoing problems related to technical insolvency of US commercial banks is not just confined to the so called legacy/toxic RMBS ...

Credit default swaps (CDS) which constitute up to 98 % of credit derivatives have had a unique, endemic and pernicious role to play in the current financial crisis. However, there are few in depth empirical studies of the financial network interconnections among banks and between banks and non-banks involved as CDS protection buyers and protection sellers. The ongoing problems related to technical insolvency of US commercial banks is not just confined to the so called legacy/toxic RMBS assets on balance sheets but also because of their credit risk exposures from SPVs (Special Purpose Vehicles) and the CDS markets. The dominance of a few big players in the chains of insurance and reinsurance for CDS credit risk mitigation for banks ’ assets has led to the idea of “too interconnected to fail ” resulting, as in the case of AIG, of having to maintain the fiction of non-failure in order to avert a credit event that can bring down the CDS pyramid and the financial system. This paper also ...

When extended to sovereign issuers, the Merton‐type structural model suggests a negative relationship between sovereign credit default swap (CDS) spreads and stock prices. In practice, capital structure arbitrage that exploits such relationships should foster the integration of CDS and the stock market and improve price discovery. This paper studies the dynamic relationship between sovereign CDS spreads and stock prices for seven Asian countries for the period from January 2001 to February 2007. We find a strong negative correlation between the CDS spread and the stock index for most Asian countries. A long‐run equilibrium price relationship is found for China, Korea, and Thailand. The limited integration in other countries may arise from market frictions and model applicability. In terms of price discovery, CDS markets play a leading role in five out of seven countries. Therefore, equity investors should span the CDS market for incremental information. The stock market has a feedba...

This paper analyzes the response of stock and credit default swap (CDS) markets to rating announcements made by the three major rating agencies during the period 2000–2002. Applying event study methodology, we examine whether and how strongly these markets respond to rating ...

Page 1. Credit Enhancement: Letters of Credit, Guaranties, Insurance and Swaps (The Clash of Cultures) By Robert D. Aicher Deborah L. Cotton and TK Khan* Over the doors of Moody's Investors Service at 99 Church Street in New York City is a large plaque. ...

Using data from the credit default swap (CDS), corporate bond, and equity markets, we construct several measures of liquidity and examine the spill-over of liquidity shocks across these markets. Based on the principal component analysis of multiple liquidity measures, we show that there is a dominant first principal component in each of the markets. However, the linkage of liquidity shocks varies between different markets. In particular, there is a common component between the equity and both CDS and bond markets, but not between the CDS and bond market. Moreover, the vector autoregression results show that while there is spill-over of liquidity shocks between equity and CDS markets, surprisingly there is no clear spill-over of liquidity shocks between equity and bond markets. There appears to be a time lag of liquidity spill-over from the CDS to both bond and equity markets. Finally, we find no evidence of liquidity spill-over from bond to CDS market. Key Words: Liquidity shock; Co...

The article substantiates the authors approach to the definition of credit derivatives. The analysis of development and functioning of the world market of credit default swaps is conducted. The problems of regulation of the world market of credit derivatives are revealed and ways of their solution are suggested.

This article investigates the dynamics of conditional correlation among the G14 banks’ dealer for the credit default swap market from January 2004 until May 2009. By using the asymmetric dynamic conditional correlation model developed by Cappiello, Engle and Sheppard (2006), we examine if there is contagion during the global financial crisis, following Lehman Brothers’ bankruptcy of September 15th, 2008. The main contribution of this article is to analyze if the interdependence structure between the G14 banks changed significantly during the crisis period. We try to identify the banks which were the most or the least affected by losses induced by the crisis and we draw some conclusions in terms of their vulnerability to financial shocks. We find that all banks became highly interdependent during Lehman Brothers’ bankruptcy (short term impact), but only some banks faced high contagion during the global financial crisis (long term impact). Regulators who try to reinforce banks’ stabil...

Nascent markets for credit derivatives and structured credit in Asia and the Pacific were poised for rapid growth when the global financial turmoil hit. While there has been no significant deterioration in the quality of the underlying names, credit markets in the region have been swept up in the global widening of spreads and aversion to structured finance.

In this paper, we examine unethical misuse of three derivative securities of mortgage-backed securities (MBS), credit default swap (CDS), and collateralized debt obligations (CDO) to understand the cause of the global financial crisis. We then gauge ...