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Overpricing in Emerging Market Credit-Default-Swap Contracts: Some Evidence from Recent Distress Cases

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Author Info

  • Jochen R. Andritzky
  • Manmohan Singh

Abstract

Since recent debt restructurings that constitute credit events have been more frequent than outright defaults, sovereign bond prices may not collapse during distress. In this case, the likely high recovery values after restructuring suggest that the cost of credit-default-swap (CDS) contracts to the buyer (as measured by CDS spreads) may be higher than warranted. We estimate the extent of such overpricing by using the cheapest-to-deliver (CTD) bond as a proxy for the recovery-value assumption.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/125.

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Length: 13
Date of creation: 01 Jun 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/125

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Related research

Keywords: Bonds; Debt restructuring; Emerging markets;

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References

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  1. Duffie, Darrell & Huang, Ming, 1996. " Swap Rates and Credit Quality," Journal of Finance, American Finance Association, vol. 51(3), pages 921-49, July.
  2. Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, vol. 53(6), pages 2225-2241, December.
  3. Gurdip Bakshi & Dilip Madan & Frank Zhang, 2001. "Understanding the role of recovery in default risk models: empirical comparisons and implied recovery rates," Finance and Economics Discussion Series 2001-37, Board of Governors of the Federal Reserve System (U.S.).
  4. Brennan, Michael J. & Schwartz, Eduardo S., 1980. "Analyzing Convertible Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(04), pages 907-929, November.
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Cited by:
  1. Jeromin Zettelmeyer & Federico Sturzenegger, 2005. "Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998-2005," IMF Working Papers 05/137, International Monetary Fund.
  2. Michael Adler & Jeong Song, 2010. "The behavior of emerging market sovereigns' credit default swap premiums and bond yield spreads," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 31-58.
  3. Sanjeev Gupta & Amine Mati & Emanuele Baldacci, 2008. "Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets," IMF Working Papers 08/259, International Monetary Fund.
  4. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950 - 2010: Literature Survey, Data, and Stylized Facts," IMF Working Papers 12/203, International Monetary Fund.

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