As a result of the complexity of defining what constitutes default, the industry has expended great effort to provide clear guidance on what credit events are covered by a CDS contract. As with all efforts to write a perfect contract, however, no such device exists and disputes do occasionally arise. We will take a look at these issues later. This reading is organized as follows: Section 2 explores basic definitions and concepts, and Section 3 covers the elements of valuation and pricing. Section 4 discusses applications. Section 5 provides a summary.
15 June 2012
This reading on credit default swaps provides a basic introduction to these instruments and their markets. The following key points are covered:. We were not able to record your CE credits. Please try again. Contact us if you continue to see this message. Your CE credits have been recorded. Manage your Continuing Education credits. This implies that this phenomenon is not uniquely related to the shortest maturity CDS spreads.. Before calculating the portfolio CDS spreads, the 1st and 99th percentiles of the CDS spreads are removed from the cross-sectional distribution of the CDS spreads for each month and maturity..
We remove the 1st and 99th percentiles of the CDS bid-ask spreads from their respective distribution for each month and maturity.. See Bongaerts et al. To calculate the aggregate bid-ask spread measure of illiquidity for the CDS market, we use the bid and ask quotes from the CMA database for the companies that coincide with those in the Markit database.
We then compare the difference in monthly CDS spreads between these two sources by using the measure of mean absolute error MAE. The mean median of the MAE for the average of the bid and ask quotes from the CMA database and the CDS spreads from the Markit database across all coinciding companies are 37 14 , 25 7 , 19 3 , 21 5 , and 25 8 basis points for maturities of 1, 3, 5, 7, and 10 years, respectively.. We obtain nominal consumption expenditures on nondurable goods and services from Table 2. All this information is used to construct monthly seasonally adjusted real per capita consumption expenditures on nondurable goods and services.
The autoregressive parameter of the habit process is estimated using the price-dividend ratio obtained from the original series on Robert Shiller's website. ISSN: Indexed in: Scopus See more Follow us:. Discontinued publication For more information click here. Previous article Next article. Issue 2. Pages July - December More article options.
Aggregate default and illiquidity of credit default swap spreads. Download PDF. Armen Arakelyan. This item has received. Article information. Show more Show less. Table 1. Table 5. Low credit rating CDS spreads are highly sensitive to aggregate default and illiquidity shocks relative to high credit quality CDS spreads. Credit default swap. JEL classification:. Furthermore, the concerns over the default and illiquidity of CDS spreads have become especially relevant after the financial crisis of when both default and illiquidity skyrocketed jointly.
To the best of our knowledge, this is the first study to address empirically the importance of both default and illiquidity of CDS spreads at an aggregate level. In addition, we remove potentially confounding credit risk exposure from the CDS bid-ask spreads. Hence, in our empirical analysis we work with a residual measure of illiquidity that is net of default exposure. Section 4 concludes. In total, we have CDS contracts in our sample. CDS names by sector and rating. Table 2.
Portfolio CDS spreads. Table 3. Liquidity proxies and macro variables. The data for most of the measures are from January to April , except for the bid-ask spreads and the bond market illiquidity, which end in December and September , respectively. Table 4. Correlation matrix of liquidity proxies and macro variables. The correlation matrix at each maturity is based on the months for which the data on all variables overlap.
Acharya, Y. Amihud, S. Acharya, T. Acharya, L.
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Illiquidity and stock returns: cross-section and time-series effects. Ang, M. Piazzesi, M. What does the yield curve tell us about GDP growth?. Arakelyan, G. Rubio, P. Working Paper. Bao, J. Pan, J. Finance, 66 , pp. Blanco, S. Brennan, I. An empirical analysis of the dynamic relation between investment-grade bonds and credit default swaps. Finance, 60 , pp. Bollerslev, G. Tauchen, H. Expected stock returns and variance risk premia.
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Lin, J. Wang, C. Liquidity risk and expected corporate bond returns. Longstaff, S. Mithal, E. Corporate yield spreads: default risk or liquidity? New evidence from the credit default swap market. Longstaff, J. Pan, L. Pedersen, K. Credit Spreads and Real Activity. London School of Economics, ,. Pan, K. Default and recovery implicit in the term structure of sovereign CDS spreads.
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The economic role of jumps and recovery rates in the market for corporate default risk. Stock, M. Forecasting output and inflation: the role of asset prices. Tang, H. Liquidity and Credit Default Swap Spreads.
Credit Default Swap (CDS) Definition
University of Hong Kong, ,. However, many empirical papers consider CDS contract with 5 year maturity to be the most actively traded, while the evidence for liquidity in CDS contracts with other maturities is mixed. This implies that this phenomenon is not uniquely related to the shortest maturity CDS spreads. Before calculating the portfolio CDS spreads, the 1st and 99th percentiles of the CDS spreads are removed from the cross-sectional distribution of the CDS spreads for each month and maturity. We remove the 1st and 99th percentiles of the CDS bid-ask spreads from their respective distribution for each month and maturity.
The mean median of the MAE for the average of the bid and ask quotes from the CMA database and the CDS spreads from the Markit database across all coinciding companies are 37 14 , 25 7 , 19 3 , 21 5 , and 25 8 basis points for maturities of 1, 3, 5, 7, and 10 years, respectively. Subscribe to our newsletter. Print Send to a friend Export reference Mendeley Statistics. Evidence from purchases and redemptions in the Spanish Effect of signals of bank ratings on stock returns before Crowdfunding: The collaborative economy for channelling Instructions for authors Submit an article Ethics in publishing.
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CdsQuoteConvention (OpenGamma Strata)
Consumer services. Health care. You are commenting using your WordPress. You are commenting using your Google account. You are commenting using your Twitter account. You are commenting using your Facebook account. Notify me of new comments via email. Notify me of new posts via email. Skip to content. Introduction Part 1 of this series of articles described the basic mechanics of a credit default swap.
Conclusion This part concludes the discussion of the changes in the mechanics of CDS trading since Rate this:. Share this: Twitter Facebook. Like this: Like Loading Tagged beginners guide cds credit default swap derivatives introduction tutorial. Published by richnewman. Published August 4, August 8, Next Post Closures in C. Suck a complex subject is very well explained.
Very well explained.
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