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How Safe are Central Counterparties in Credit Default Swap Markets?

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  • H Peyton Young
  • Mark Paddrik

Abstract

We propose a general framework for estimating the vulnerability to default by a central counterparty (CCP) in the credit default swaps market. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the U.S. credit default swaps market under shocks that are similar in magnitude to the Federal Reserve’s stress tests. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.

Suggested Citation

  • H Peyton Young & Mark Paddrik, 2019. "How Safe are Central Counterparties in Credit Default Swap Markets?," Economics Series Working Papers 885, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:885
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Credit default swaps; central counterparties; stress testing; systemic risk; financial networks;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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