IDEAS home Printed from https://ideas.repec.org/p/rdg/icmadp/icma-dp2003-04.html
   My bibliography  Save this paper

An Empirical Study of Credit Default Swaps

Author

Listed:
  • Frank Skinner

    () (ICMA Centre, University of Reading)

  • Antonio Diaz

    (Associate Professor - Departamento de Economia y Empresa, Universidad de Castilla - La Mancha, Span)

Abstract

We examine the pricing of Asian and non-Asian credit default swaps that traded during the 1997 to 1999 time period. We employ two credit risk models, Duffie and Singleton (1999) and Jarrow and Turnbull (1995). We argue that credit default swaps should have a positive economic value since credit spreads reflect differences in liquidity as well as credit risk. However, in the presence of moral hazard we expect to see negative economic values since asymmetric information would motivate sellers of credit default swaps to demand a “restructuring premium”. While we generally find positive economic values for credit default swaps, both models find negative economic values for Asian credit default swaps during the recent Asian currency crisis, which we attribute to moral hazard.

Suggested Citation

  • Frank Skinner & Antonio Diaz, 2002. "An Empirical Study of Credit Default Swaps," ICMA Centre Discussion Papers in Finance icma-dp2003-04, Henley Business School, Reading University, revised Jan 2003.
  • Handle: RePEc:rdg:icmadp:icma-dp2003-04
    as

    Download full text from publisher

    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2003-04.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453 World Scientific Publishing Co. Pte. Ltd..
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. Pierre Collin-Dufresne, 2001. "On the Term Structure of Default Premia in the Swap and LIBOR Markets," Journal of Finance, American Finance Association, vol. 56(3), pages 1095-1115, June.
    4. Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, vol. 53(6), pages 2225-2241, December.
    5. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Romain Cuchet & Pascal François & Georges Hübner, 2013. "Currency total return swaps: valuation and risk factor analysis," Quantitative Finance, Taylor & Francis Journals, vol. 13(7), pages 1135-1148, February.
    2. Yang Liu & Bruce Morley, 2012. "Sovereign credit default swaps and the macroeconomy," Applied Economics Letters, Taylor & Francis Journals, vol. 19(2), pages 129-132, February.
    3. repec:eid:wpaper:03/11 is not listed on IDEAS

    More about this item

    Keywords

    Credit default swaps; moral hazard; recovery rates; asymmetric information;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    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:rdg:icmadp:icma-dp2003-04. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie Pearson). General contact details of provider: http://edirc.repec.org/data/bsrdguk.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.