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Risk aversion and risk premia in the CDS market

  • Jeffery D Amato
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    Credit default swap (CDS) spreads compensate investors for expected loss, but they also contain risk premia because of investors' aversion to default risk. We estimate CDS risk premia and default risk aversion to have been highly volatile during 2002– 2005. Both measures appear to be related to fundamental macroeconomic factors, such as the stance of monetary policy, and technical market factors, such as issuance of collateralised debt obligations.

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    File URL: http://www.bis.org/publ/qtrpdf/r_qt0512e.pdf
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    Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

    Volume (Year): (2005)
    Issue (Month): (December)
    Pages:

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    Handle: RePEc:bis:bisqtr:0512e
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    1. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
    2. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
    3. Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
    4. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2004. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market," NBER Working Papers 10418, National Bureau of Economic Research, Inc.
    5. Franck Packer & Haibin Zhu, 2005. "Contractual terms and CDS pricing," BIS Quarterly Review, Bank for International Settlements, March.
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