IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v103y2025ics1057521925002571.html
   My bibliography  Save this article

Modeling optimal strategies in CDS markets: The role of creditor-issuer dynamics

Author

Listed:
  • Banerjee, Suman
  • Kong, Mingyuan

Abstract

We develop a model to analyze the optimal strategies of creditors and CDS issuers. By establishing conditions that ensure the reservation price of creditors exceeds that of the issuers, we demonstrate the existence of a CDS market. The difference between these reservation prices, influenced by factors such as risk aversion and fundamental uncertainty, plays a crucial role in shaping CDS market dynamics. We find that the issuer’s reservation price increases with the size of their equity position in the reference-entity, and decreases with the diversity of the issuer’s credit-risk portfolio. These findings have implications for the optimal design of CDS markets.

Suggested Citation

  • Banerjee, Suman & Kong, Mingyuan, 2025. "Modeling optimal strategies in CDS markets: The role of creditor-issuer dynamics," International Review of Financial Analysis, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:finana:v:103:y:2025:i:c:s1057521925002571
    DOI: 10.1016/j.irfa.2025.104170
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521925002571
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2025.104170?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Credit Default Swaps; CDS; Credit risk; Reference entity; Default premium; Insurance; CDS market dynamics;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:103:y:2025:i:c:s1057521925002571. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.