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An Empirical Study of Credit Default Swaps

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  • Frank Skinner

    ()
    (ICMA Centre, University of Reading)

  • Antonio Diaz

    (Associate Professor - Departamento de Economia y Empresa, Universidad de Castilla - La Mancha, Span)

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    Abstract

    We 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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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2003-04.pdf
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    Bibliographic Info

    Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2003-04.

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    Length: 34 pages
    Date of creation: Jan 2002
    Date of revision: Jan 2003
    Handle: RePEc:rdg:icmadp:icma-dp2003-04

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    Related research

    Keywords: Credit default swaps; moral hazard; recovery rates; asymmetric information;

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    References

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    1. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
    3. 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.
    4. Pierre Collin-Dufresne, 2001. "On the Term Structure of Default Premia in the Swap and LIBOR Markets," Journal of Finance, American Finance Association, vol. 56(3), pages 1095-1115, 06.
    5. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
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    Cited by:
    1. repec:eid:wpaper:03/11 is not listed on IDEAS
    2. Yang Liu & Bruce Morley, 2012. "Sovereign credit default swaps and the macroeconomy," Applied Economics Letters, Taylor & Francis Journals, vol. 19(2), pages 129-132, February.
    3. Romain Cuchet & Pascal François & Georges Hübner, 2011. "Currency Total Return Swaps: Valuation and Risk Factor Analysis," Cahiers de recherche 1128, CIRPEE.
    4. Ramaprasad Bhar, 2010. "Stochastic Filtering With Applications In Finance:," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736.

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