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Functions and characteristics of corporate and sovereign CDS

  • Vogel, Heinz-Dieter
  • Bannier, Christina E.
  • Heidorn, Thomas

After the onset of the subprime crisis and the European debt crisis, credit default swaps (CDS) have seen a strong increase in usage. Particularly sovereign CDS protection has been sought after, paralleling the rise in sovereign debt levels, slumps in GDP growth and political tensions in Eurozone peripheral countries. Understanding the strengths and weaknesses of CDS products has hence become ever more important, from both the perspective of individual market participants and regulatory bodies. This paper gives an overview of the origins and characteristics of CDS products by discussing the various stages of the product life-cycle. In a second step, we investigate the development and functioning of the CDS market. We focus particularly on the differences between corporate and sovereign CDS and provide insights into the respective structure of market participants, means of product usage and regulatory conditions.

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Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 203.

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Date of creation: 2013
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Handle: RePEc:zbw:fsfmwp:203
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  1. Roberto Blanco & Simon Brennan & Ian W. Marsh, 2004. "An empirical analysis of the dynamic relationship between investment grade bonds and credit default swaps," Banco de Espa�a Working Papers 0401, Banco de Espa�a.
  2. Afonso, António & Furceri, Davide & Gomes, Pedro, 2011. "Sovereign credit ratings and financial markets linkages: application to European data," Working Paper Series 1347, European Central Bank.
  3. Stulz, Rene M., 2009. "Credit Default Swaps and the Credit Crisis," Working Paper Series 2009-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  4. M. Kabir Hassan & Geoffrey M. Ngene & Jung Suk-Yu, 2011. "Credit Default Swaps and Sovereign Debt Markets," NFI Working Papers 2011-WP-03, Indiana State University, Scott College of Business, Networks Financial Institute.
  5. Duquerroy, A. & Gauthier, N. & Gex, M., 2009. "Credit default swaps and financial stability: risks and regulatory issues," Financial Stability Review, Banque de France, issue 13, pages 75-88, September.
  6. Fontana, Alessandro & Scheicher, Martin, 2010. "An analysis of euro area sovereign CDS and their relation with government bonds," Working Paper Series 1271, European Central Bank.
  7. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
  8. Adrian Blundell-Wignall & Paul Atkinson, 2010. "Thinking beyond Basel III: Necessary Solutions for Capital and Liquidity," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2010(1), pages 9-33.
  9. Bryan J. Noeth & Rajdeep Sengupta, 2012. "A look at credit default swaps and their impact on the European debt crisis," The Regional Economist, Federal Reserve Bank of St. Louis, issue Apr.
  10. Delatte, Anne-Laure & Gex, Mathieu & López-Villavicencio, Antonia, 2012. "Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis?," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 481-497.
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