An Empirical Study of Credit Default Swaps
AbstractWe examine the pricing of Asian and non-Asian credit default swaps that traded during the 1997 to 1999 time period. We employ two credit risk models, Duffie and Singleton (1999) and Jarrow and Turnbull (1995). We argue that credit default swaps should have a positive economic value since credit spreads reflect differences in liquidity as well as credit risk. However, in the presence of moral hazard we expect to see negative economic values since asymmetric information would motivate sellers of credit default swaps to demand a “restructuring premium”. While we generally find positive economic values for credit default swaps, both models find negative economic values for Asian credit default swaps during the recent Asian currency crisis, which we attribute to moral hazard.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2003-04.
Length: 34 pages
Date of creation: Jan 2002
Date of revision: Jan 2003
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More information through EDIRC
Credit default swaps; moral hazard; recovery rates; asymmetric information;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
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