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The determinants of credit default swap spreads in the presence of structural breaks and counterparty risk

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  • Kapar, B.
  • Olmo, J.

Abstract

By investigating the determinants of CDS spreads on European contracts before and after the recent crisis we observe significant differences in the explanatory power of market and firm-specific variables. Before the crisis, the underlying credit risk in the overall CDS market is sufficient to explain credit risk. During the crisis investors have a differing view on the risk of financial and non-financial contracts; whereas non-financial CDS contracts reflect the credit risk of the counterparty, financial contracts do not. Our results suggest that in case of default of financial firms, investors expect the government to intervene to alleviate credit risk of the counterparty and fears of systemic risk.

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File URL: http://openaccess.city.ac.uk/1465/1/The_Determinants_of_Credit_Default_Swap_Spreads_in_the_Presence_of_Structural_Breaks_and_Counterparty_Risk.pdf
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Bibliographic Info

Paper provided by Department of Economics, City University London in its series Working Papers with number 11/02.

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Date of creation: 2011
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Handle: RePEc:cty:dpaper:11/02

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Postal: Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom,
Phone: +44 (0)20 7040 8500
Web page: http://www.city.ac.uk
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Related research

Keywords: co-integration; counterparty risk; credit default swaps; credit risk; iTraxx index;

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  1. Ericsson, Jan & Jacobs, Kris & Oviedo-Helfenberger, Rodolfo, 2004. "The Determinants of Credit Default Swap Premia," SIFR Research Report Series 32, Institute for Financial Research.
  2. Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
  3. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
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