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Functions and characteristics of corporate and sovereign CDS

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  • Vogel, Heinz-Dieter
  • Bannier, Christina E.
  • Heidorn, Thomas

Abstract

After the onset of the subprime crisis and the European debt crisis, credit default swaps (CDS) have seen a strong increase in usage. Particularly sovereign CDS protection has been sought after, paralleling the rise in sovereign debt levels, slumps in GDP growth and political tensions in Eurozone peripheral countries. Understanding the strengths and weaknesses of CDS products has hence become ever more important, from both the perspective of individual market participants and regulatory bodies. This paper gives an overview of the origins and characteristics of CDS products by discussing the various stages of the product life-cycle. In a second step, we investigate the development and functioning of the CDS market. We focus particularly on the differences between corporate and sovereign CDS and provide insights into the respective structure of market participants, means of product usage and regulatory conditions. --

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Bibliographic Info

Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 203.

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Date of creation: 2013
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Handle: RePEc:zbw:fsfmwp:203

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Keywords: Credit default swaps; European sovereign CDS; Corporate CDS;

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  1. Afonso, António & Furceri, Davide & Gomes, Pedro, 2012. "Sovereign credit ratings and financial markets linkages: Application to European data," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 606-638.
  2. Rene M. Stulz, 2010. "Credit Default Swaps and the Credit Crisis," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 73-92, Winter.
  3. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
  4. Roberto Blanco & Simon Brennan & Ian W. Marsh, 2004. "An empirical analysis of the dynamic relationship between investment grade bonds and credit default swaps," Banco de Espa�a Working Papers 0401, Banco de Espa�a.
  5. Adrian Blundell-Wignall & Paul Atkinson, 2010. "Thinking beyond Basel III: Necessary Solutions for Capital and Liquidity," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2010(1), pages 9-33.
  6. Duquerroy, A. & Gauthier, N. & Gex, M., 2009. "Credit default swaps and financial stability: risks and regulatory issues," Financial Stability Review, Banque de France, issue 13, pages 75-88, September.
  7. Fontana, Alessandro & Scheicher, Martin, 2010. "An analysis of euro area sovereign CDS and their relation with government bonds," Working Paper Series 1271, European Central Bank.
  8. Delatte, Anne-Laure & Gex, Mathieu & López-Villavicencio, Antonia, 2012. "Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis?," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 481-497.
  9. Bryan J. Noeth & Rajdeep Sengupta, 2012. "A look at credit default swaps and their impact on the European debt crisis," The Regional Economist, Federal Reserve Bank of St. Louis, issue Apr.
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