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Contagion and risk premia in the amplification of crisis: evidence from Asian names in the global CDS market

In: The international financial crisis and policy challenges in Asia and the Pacific

  • Don H Kim

    (Yonsei University)

  • Mico Loretan

    (International Monetary Fund)

  • Eli M Remolona

    (Bank for International Settlements)

In the turmoil of 2007-2009, troubles in a small segment of the US mortgage market escalated into a crisis of global proportions. A striking feature of the crisis is the contagion that hit Asia. In a region where direct exposures to problem mortgages were minimal, credit spreads for major borrowers widened even more than they did in Europe and the United States. We argue that the contagion was part of an amplification mechanism driven by valuation losses caused by the bursting of a global credit bubble. The valuation losses stemmed not so much from a reassessment of credit risks as from a global repricing of these risks. It was this repricing that was the main channel for contagion into Asian credit (and equity) markets. For empirical evidence, we analyze fluctuations in credit default swap (CDS) spreads and expected default frequencies (EDFs) for major Asian borrowers. We find that valuation losses on CDS contracts for these Asian borrowers arose in part from movements in global and region-specific risk pricing factors as well as from revisions to expected losses from defaults.

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This chapter was published in:
  • Bank for International Settlements, 2010. "The international financial crisis and policy challenges in Asia and the Pacific," BIS Papers, Bank for International Settlements, number 52, April.
  • This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 52-19.
    Handle: RePEc:bis:bisbpc:52-19
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