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Explaining Credit Default Swap Spreads With Equity Volatility And Jump Risks Of Individual Firms
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Book Synopsis Explaining Credit Default Swap Spreads with Equity Volatility and Jump Risks of Individual Firms by : Yibin Zhang
Download or read book Explaining Credit Default Swap Spreads with Equity Volatility and Jump Risks of Individual Firms written by Yibin Zhang and published by . This book was released on 2005 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Explaining Credit Default Swap Spreads With the Equity Volatility and Jump Risks of Individual Firms by : Benjamin Yi-Bin Zhang
Download or read book Explaining Credit Default Swap Spreads With the Equity Volatility and Jump Risks of Individual Firms written by Benjamin Yi-Bin Zhang and published by . This book was released on 2013 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper attempts to explain the credit default swap (CDS) premium, using a novel approach to identify the volatility and jump risks of individual firms from high-frequency equity prices. Our empirical results suggest that the volatility risk alone predicts 48 percent of the variation in CDS spread levels, whereas the jump risk alone forecasts 19 percent. After controlling for credit ratings, macroeconomic conditions, and firms' balance sheet information, we can explain 73 percent of the total variation. We calibrate a Merton-type structural model with stochastic volatility and jumps, which can help to match credit spreads after controlling for the historical default rates. Simulation evidence suggests that the high-frequency-based volatility measures can help to explain the credit spreads, above and beyond what is already captured by the true leverage ratio.
Book Synopsis Credit Default Swap Spreads and Variance Risk Premia (VRP) by : Hao Wang
Download or read book Credit Default Swap Spreads and Variance Risk Premia (VRP) written by Hao Wang and published by DIANE Publishing. This book was released on 2011-04 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Explaining Dredit Default Swap Spreads Witiz Eyuity Volatility and Jump Risks of Individual Firms by : Benjamin Yibin Zhang
Download or read book Explaining Dredit Default Swap Spreads Witiz Eyuity Volatility and Jump Risks of Individual Firms written by Benjamin Yibin Zhang and published by . This book was released on 2005 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Explaining the Level of Credit Spreads by : Martijn Cremers
Download or read book Explaining the Level of Credit Spreads written by Martijn Cremers and published by . This book was released on 2005 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prices of equity index put options contain information on the price of systematic downward jump risk. We use a structural jump-diffusion firm value model to assess the level of credit spreads that is generated by option-implied jump risk premia. In our compound option pricing model, an equity index option is an option on a portfolio of call options on the underlying firm values. We calibrate the model parameters to historical information on default risk, the equity premium and equity return distribution, and S & P 500 index option prices. Our results show that a model without jumps fails to fit the equity return distribution and option prices, and generates a low out-of-sample prediction for credit spreads. Adding jumps and jump risk premia improves the fit of the model in terms of equity and option characteristics considerably and brings predicted credit spread levels much closer to observed levels.
Book Synopsis Market Conditions, Default Risk and Credit Spreads by : Dragon Yongjun Tang
Download or read book Market Conditions, Default Risk and Credit Spreads written by Dragon Yongjun Tang and published by . This book was released on 2010 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study empirically examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, we find that average credit spreads decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. At the market level, investor sentiment is the most important determinant of credit spreads. At the firm level, credit spreads generally rise with cash flow volatility and beta, with the effect of cash flow beta varying with market conditions. We identify implied volatility as the most significant determinant of default risk among firm-level characteristics. Overall, a major portion of individual credit spreads is accounted for by firm-level determinants of default risk, while macroeconomic variables are directly responsible for a lesser portion.
Book Synopsis Credit Default Swaps by : Christopher L. Culp
Download or read book Credit Default Swaps written by Christopher L. Culp and published by Springer. This book was released on 2018-07-12 with total page 356 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book, unique in its composition, reviews the academic empirical literature on how CDSs actually work in practice, including during distressed times of market crises. It also discusses the mechanics of single-name and index CDSs, the theoretical costs and benefits of CDSs, as well as comprehensively summarizes the empirical evidence on important aspects of these instruments of risk transfer. Full-time academics, researchers at financial institutions, and students will benefit from the dispassionate and comprehensive summary of the academic literature; they can read this book instead of identifying, collecting, and reading the hundreds of academic articles on the important subject of credit risk transfer using derivatives and benefit from the synthesis of the literature provided.
Book Synopsis Credit Default Swaps by : Marti Subrahmanyam
Download or read book Credit Default Swaps written by Marti Subrahmanyam and published by Now Publishers. This book was released on 2014-12-19 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit Default Swaps: A Survey is the most comprehensive review of all major research domains involving credit default swaps (CDS). CDS have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly since the credit crisis of 2007-2009. The authors review the extant literature on CDS that has accumulated over the past two decades and divide the survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles, structural, and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the bond and equity markets, with an emphasis on market efficiency, price discovery, information flow, and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and corporate governance. The sixth section analyzes how CDS impact the economic incentives of financial intermediaries. The seventh section reviews the growing literature on sovereign CDS and highlights the major differences between the sovereign and corporate CDS markets. The eighth section discusses CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. The authors close with our suggestions for promising future research directions on CDS contracts and markets.
Book Synopsis The Information Content of Option-Implied Volatility for Credit Default Swap Valuation by : Charles Cao
Download or read book The Information Content of Option-Implied Volatility for Credit Default Swap Valuation written by Charles Cao and published by . This book was released on 2012 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit default swaps (CDS) are similar to out-of-the-money put options in that both offer a low cost and effective protection against downside risk. This study investigates whether put option-implied volatility is an important determinant of CDS pricing. Using a large sample of firms with both CDS and options data, we find that individual firms' put option-implied volatility dominates historical volatility in explaining the time-series variation in CDS spreads. To understand this result, we show that implied volatility is a more efficient forecast for future realized volatility than historical volatility. More importantly, the volatility risk premium embedded in option prices covaries with the CDS spread. These findings complement existing empirical evidence based on market-level data.
Book Synopsis Explaining Credit Default Swap Spreads by Means of Realized Jumps and Volatilities in the Energy Market by : José Da Fonseca
Download or read book Explaining Credit Default Swap Spreads by Means of Realized Jumps and Volatilities in the Energy Market written by José Da Fonseca and published by . This book was released on 2015 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the relationship between credit default swap spreads (CDS) for the Energy sector and oil futures dynamics. Using data on light sweet crude oil futures from 2004 to 2013, which contains a crisis period, we examine the importance of volatility and jumps extracted from the futures in explaining CDS spread changes. The analysis is performed at an index level and by rating group; as well as for the pre-crisis, crisis and post-crisis periods. Our findings are consistent with Merton's theoretical framework. At an index level, futures' jumps are important when explaining CDS spread changes, with negative jumps having higher impact during the crisis. The continuous volatility part is significant and positive indicating that futures volatility conveys relevant information for the CDS market. As for the analysis per rating group, negative jumps have an increasing importance as the credit rating deteriorates, and during the crisis period; while the results for positive jumps and futures volatility are mixed. Overall, the relation between the CDS market and the futures market is stronger during volatile periods and strengthens after the Global Financial Crisis.
Book Synopsis The Risks and Benefits of Credit Default Swaps and the Impact of a New Regulatory Environment by : Christoph Theis
Download or read book The Risks and Benefits of Credit Default Swaps and the Impact of a New Regulatory Environment written by Christoph Theis and published by Haupt Verlag AG. This book was released on 2014 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seit dem Ausbruch der jüngsten Finanzkrise sind Credit Default Swaps (CDS) ins Rampenlicht des akademischen und medialen Interesses gerückt und bilden seitdem den Gegenstand einer kontroversen Diskussion. Auf Europäischer Ebene werden zudem neue regulatorische Rahmenbedingungen eingeführt, die weitreichende Auswirkungen auf den CDS Markt haben werden. Die angesprochenen Kontroversen sowie die bevorstehenden regulatorischen Veränderungen machen den CDS Markt daher zu einem spannenden und wichtigen Forschungsgegenstand. Die vorliegende Dissertation beschäftigt sich in vier Forschungsarbeiten mit den Implikationen des Einsatzes von CDS auf Marktteilnehmer und gibt im speziellen Antworten auf offene Fragen hinsichtlich der Anwendung von Kreditrisikomodellen, des Nutzens und der Risiken von CDS und den Auswirkungen neuer Regulierungen auf den CDS Markt. In Kapitel I werden die theoretischen Grundlagen zur Messung des Kreditrisikos gelegt, wobei der Fokus auf der praktischen Anwendung von Kreditrisikomodellen liegt. Hierbei untersuche ich die zwei gängigsten Kreditrisikomodelle: den firmenwertbasierten sowie den intensitätsbasierten Ansatz. Dabei gewinne ich wichtige Einblicke in den Einsatz von Kreditrisikomodellen im Zusammenhang mit der Nutzung von Kreditderivaten. In Kapitel II werden der Nutzen und die Risiken von CDS unter theoretischen und empirischen Gesichtspunkten einer Analyse unterzogen. Basierend auf der Analyse werden nachfolgend regulatorische Handlungsempfehlungen abgeleitet und diskutiert. Die Ergebnisse zeitigen eine Reihe von Risiken, die sich insbesondere in Krisenzeiten verstärken und daher effektivere zukünftige Regulierungen verlangen. Kapitel III konzentriert sich auf neue regulatorische Anforderungen im CDS Markt. Dabei liegt der Fokus auf der Ausgestaltung der Zentralen Gegenparteien und den Auswirkungen deren Einführung auf die Marktteilnehmer. Die Ergebnisse zeigen, dass Zentrale Gegenparteien ein.
Book Synopsis Derivatives and Hedge Funds by : Stephen Satchell
Download or read book Derivatives and Hedge Funds written by Stephen Satchell and published by Springer. This book was released on 2016-05-18 with total page 416 pages. Available in PDF, EPUB and Kindle. Book excerpt: Over the last 20 years hedge funds and derivatives have fluctuated in reputational terms; they have been blamed for the global financial crisis and been praised for the provision of liquidity in troubled times. Both topics are rather under-researched due to a combination of data and secrecy issues. This book is a collection of papers celebrating 20 years of the Journal of Derivatives and Hedge Funds (JDHF). The 18 papers included in this volume represent a small sample of influential papers included during the life of the Journal, representing industry-orientated research in these areas. With a Preface from co-editor of the journal Stephen Satchell, the first part of the collection focuses on hedge funds and the second on markets, prices and products.
Book Synopsis The Credit Default Swap Market's Determinants by : Caitlin Ann Greatrex
Download or read book The Credit Default Swap Market's Determinants written by Caitlin Ann Greatrex and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores the ability of variables suggested by structural models to explain variation in CDS spread changes. Using monthly changes in CDS spreads for 333 firms from January, 2001-March, 2006, I find that these variables are able to explain thirty percent of the variation in CDS spread changes. A rating-based CDS index that accounts for both credit risk and overall market conditions is the single best predictor of CDS spread changes. Leverage and volatility, however, are also key determinants, as these two variables can explain almost half of the explained variation in monthly CDS spread changes.
Book Synopsis The negative basis - Credit Default Swap contracts and credit risk during the financial crisis by : Matthias Schnare
Download or read book The negative basis - Credit Default Swap contracts and credit risk during the financial crisis written by Matthias Schnare and published by GRIN Verlag. This book was released on 2011-10-19 with total page 95 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2010 in the subject Economics - Finance, grade: 5.0 (Schweiz), University of Zurich (Wirtschaftswissenschaften), language: English, abstract: The current developments in the credit or bond markets, influenced by the financial crisis and the economic downturn, revive a discussion about credit derivatives as an instrument of speculation and one cause or determinant of the financial crisis. Currently, CDS are used to speculate against the solvency of the different governments. Critics look at CDS contracts as Overthecounter (OTC) instruments that are not regulated and as bilateral contracts which can have a big influence on the financial position of market participants and on the real credit markets. CDS contracts are mainly instruments for investors to insure against a default of the debtor. For the seller of the CDS they are a possibility to participate in risks he perhaps could not have taken on the bond markets otherwise. These contracts separate the default risk of the debtor from the market conditions, e.g. the market interest rates. They make it possible to only trade the credit risk of a company or a country. Therefore, they can be instruments to proof the bond values and indicators for the real credit risk of the underlying. The discussion about CDS contracts is mostly a discussion including many prejudices and it deals with aspects from different topics which cannot be mixed. Therefore, a clear picture of advantages and disadvantages and especially values and risks of CDS is difficult to be found in the current public discussion and economic newspaper articles. A further phenomenon is that bond markets and CDS markets have lost their connection in the financial crisis. So the credit risk on both markets is valued differently: the prices on the two markets differed so much that market participants used these arbitrage possibilities to earn credit riskfree money for themselves and their customers It can be traded with a simple combination of the underlying bond and the fitting CDS contract. One of the causes of the basis can be the different liquidity level in the two separated markets. For the development of the basis during the crisis it is important to ask how big the changes are compared to the situation before the financial crisis and also how important the credit rating or the industry of the reference entity is.. The price difference, if the CDS price is lower than the credit risk priced by the bond of the same reference entity, is negative basiscalled
Book Synopsis Stock Options and Credit Default Swaps by : Liuren Wu
Download or read book Stock Options and Credit Default Swaps written by Liuren Wu and published by . This book was released on 2006 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a dynamically consistent framework that allows joint valuation and estimation of stock options and credit default swaps written on the same reference company. We model default as controlled by a Poisson process with a stochastic default arrival rate. When default occurs, the stock price drops to zero. Prior to default, the stock price follows a continuous process with stochastic volatility. The instantaneous default rate and instantaneous diffusion variance rate follow a bivariate continuous Markov process, with its dynamics specified to capture the empirical evidence on stock option prices and credit default swap spreads. Under this joint specification, we derive tractable pricing solutions for stock options and credit default swaps. We estimate the joint dynamics using stock option prices and credit default swap spreads for four of the most actively traded reference companies. The estimation highlights the interaction between market risk (diffusion variance) and credit risk (default arrival) in pricing stock options and credit default swaps. While the credit risk factor dominates credit spreads at long maturities, the stock return volatility also enters credit spreads at short maturities due to positive co-movements between the diffusion variance rate and the default arrival rate. Furthermore, while the diffusion variance rate influences the implied volatility uniformly across moneyness, the impact of the credit risk factor becomes much larger on options at lower strikes. The impact of the credit risk factor on stock options also increases with option maturity. For options maturing in six months, the contribution of the credit risk factor to option pricing is comparable in magnitude to the contribution of the diffusion variance rate.
Book Synopsis Valuation of Systematic Risk in the Cross-Section of Credit Default Swap Spreads by : Sebastian Löhr
Download or read book Valuation of Systematic Risk in the Cross-Section of Credit Default Swap Spreads written by Sebastian Löhr and published by . This book was released on 2014 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyses the pricing of systematic risk factors in credit default swap contracts in a two-stage empirical framework. In the first pass, we estimate contract-specific sensitivities to several systematic risk factors by time-series regressions using quoted credit default swap (CDS) spreads of 339 U.S. entities from 2004 to 2010. We find that the credit market climate, the cross-market correlation and the market volatility explain CDS spread changes. In the second pass, we examine by crosssection regressions whether the contract-specific sensitivities to these systematic risk factors are priced in the cross-section of swap contracts by controlling for individual risk factors such as credit ratings, liquidity and leverage. We find that our basic risk factors explain about 83% of the CDS spreads prior to the crisis and about 90% during the crisis.
Book Synopsis The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions by : Jiri Podpiera
Download or read book The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions written by Jiri Podpiera and published by International Monetary Fund. This book was released on 2010-06-01 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.
