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The risk management implications of using end of day consensus pricing for single name CDS

Author

Listed:
  • Tavy Ronen

    (Rutgers Business School: Newark and New Brunswick)

  • Oleg Sokolinskiy

    (Rutgers Business School: Newark and New Brunswick)

  • Ben Sopranzetti

    (Rutgers Business School: Newark and New Brunswick)

Abstract

When markets are opaque, market participants rely to a large extent on end-of-day consensus prices published by service providers; such as in the case of the single name credit default swaps (CDS) market. End-of-day consensus CDS prices are critical for valuation and risk management purposes, since profits and losses of inventory positions can be determined by marking to market using end-of-day consensus prices. Deviations between end-of-day prices and intraday quotes can occur due to many factors, including market illiquidity. This paper identifies determinants of such deviations, lays out the times when they can occur, and examines the impact of these deviations for risk management purposes. End-of-day consensus prices are representative of average and median intraday quotes; however, in periods of high volatility and market distress, end-of-day prices can notably differ from actual intraday quotes. Such analysis can allow market participants to better rely on end-of-day consensus prices during normal market conditions.

Suggested Citation

  • Tavy Ronen & Oleg Sokolinskiy & Ben Sopranzetti, 2020. "The risk management implications of using end of day consensus pricing for single name CDS," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 269-304, July.
    • Handle: RePEc:kap:rqfnac:v:55:y:2020:i:1:d:10.1007_s11156-019-00843-2
    DOI: 10.1007/s11156-019-00843-2
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    More about this item

    Keywords

    Credit default swaps; Consensus pricing; Risk management; Default risk;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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