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The Long Run And The Short Run Relationship Between Sovereign Bond Yield Spreads And Credit Default Swaps
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Book Synopsis The Long Run and the Short Run Relationship Between Sovereign Bond Yield Spreads and Credit Default Swaps by : Brendan O'Connor
Download or read book The Long Run and the Short Run Relationship Between Sovereign Bond Yield Spreads and Credit Default Swaps written by Brendan O'Connor and published by . This book was released on 2012 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Pricing of Sovereign Credit Risk by : Mr.Emre Alper
Download or read book Pricing of Sovereign Credit Risk written by Mr.Emre Alper and published by International Monetary Fund. This book was released on 2012-01-01 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the pricing of sovereign credit risk over the period 2008-2010 for selected advanced economies by examining two widely-used indicators: sovereign credit default swap (CDS) and relative asset swap (RAS) spreads. Cointegration analysis suggests the existence of an imperfect market arbitrage relationship between the cash (RAS) and the derivatives (CDS) markets, with price discovery taking place in the latter. Likewise, panel regressions aimed at uncovering the fundamental drivers of the two indicators show that the CDS market, although less liquid, has provided a better signal for sovereign credit risk during the period of the recent financial crisis.
Book Synopsis Sovereign CDs and Bond Pricing Dynamics in Emerging Markets by : John Ammer
Download or read book Sovereign CDs and Bond Pricing Dynamics in Emerging Markets written by John Ammer and published by . This book was released on 2007 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: "We examine the relationships between credit default swap (CDS) premiums and bond yield spreads for nine emerging market sovereign borrowers. We find that these two measures of credit risk deviate considerably in the short run, due to factors such as liquidity and contract specifications, but we estimate a stable long-term equilibrium relationship for most countries. In particular, CDS premiums tend to move more than one-for-one with yield spreads, which we show is broadly consistent with the presence of a significant "cheapest-to-deliver" (CTD) option. In addition, we find a variety of cross-sectional evidence of a CTD option being incorporated into CDS premiums. In our analysis of the short-term dynamics, we find that CDS premiums often move ahead of the bond market. However, we also find that bond spreads lead CDS premiums for emerging market sovereigns more often than has been found for investment-grade corporate credits, consistent with the CTD option impeding CDS liquidity for our riskier set of borrowers. Furthermore, the CDS market is less likely to lead for sovereigns that have issued more bonds, suggesting that the relative liquidity of the two markets is a key determinant of where price discovery occurs"--Federal Reserve Board web site.
Book Synopsis Determinants of Emerging Market Sovereign Bond Spreads by : Iva Petrova
Download or read book Determinants of Emerging Market Sovereign Bond Spreads written by Iva Petrova and published by International Monetary Fund. This book was released on 2010-12-01 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyses the determimants of emerging market sovereign bond spreads by examining the short and long-run effects of fundamental (macroeconomic) and temporary (financial market) factors on these spreads. During the current global financial and economic crisis, sovereign bond spreads widened dramatically for both developed and emerging market economies. This deterioration has widely been attributed to rapidly growing public debts and balance sheet risks. Our results indicate that in the long run, fundamentals are significant determinants of emerging market sovereign bond spreads, while in the short run, financial volatility is a more important determinant of sperads than fundamentals indicators.
Book Synopsis Anticipating Credit Events Using Credit Default Swaps, with An Application to Sovereign Debt Crises by : Mr.Jorge A. Chan-Lau
Download or read book Anticipating Credit Events Using Credit Default Swaps, with An Application to Sovereign Debt Crises written by Mr.Jorge A. Chan-Lau and published by International Monetary Fund. This book was released on 2003-05-01 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: In reduced-form pricing models, it is usual to assume a fixed recovery rate to obtain the probability of default from credit default swap prices. An alternative credit risk measure is proposed here: the maximum recovery rate compatible with observed prices. The analysis of the recent debt crisis in Argentina using this methodology shows that the correlation between the maximum recovery rate and implied default probabilities turns negative in advance of the credit event realization. This empirical finding suggests that the maximum recovery rate can be used for constructing early warning indicators of financial distress.
Book Synopsis The Pricing of Credit Default Swaps During Distress by : Jochen R. Andritzky
Download or read book The Pricing of Credit Default Swaps During Distress written by Jochen R. Andritzky and published by International Monetary Fund. This book was released on 2006-11 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit default swaps (CDS) provide the buyer with insurance against certain types of credit events by entitling him to exchange any of the bonds permitted as deliverable against their par value. Unlike bonds, whose risk spreads are assumed to be the product of default risk and loss rate, CDS are par instruments, and their spreads reflect the partial recovery of the delivered bond's face value. This paper addresses the implications of the difference between bond and CDS spreads and shows the extent to which the recovery assumption matters for determining CDS spreads. A no-arbitrage argument is applied to extract recovery rates from CDS and bond markets, using data from Brazil's distress in 2002-03. Results are related to the observation that preemptive restructurings are now more common than straight defaults in sovereign bond markets and that this leads to a decoupling of CDS and bond spreads.
Book Synopsis Impact of Government Bonds Spreads on Credit Derivatives by : Verena Anna Berger
Download or read book Impact of Government Bonds Spreads on Credit Derivatives written by Verena Anna Berger and published by Springer. This book was released on 2017-11-30 with total page 94 pages. Available in PDF, EPUB and Kindle. Book excerpt: Verena Anna Berger investigates the question to what extent credit default swap spreads are impacted by an increase of government bond yields within the European area. In the first step, these spreads are computed with the help of the Hull-White model to demonstrate the theoretical calculation. The main findings which are calculated by using the Fontana-Scheicher model show that a negative impact on credit default swap spreads is observed based on the analysed data. However, there is high variation between the analysed countries so that a country-specific evaluation instead of a general review is recommended by the author.
Book Synopsis Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies by : Tigran Poghosyan
Download or read book Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies written by Tigran Poghosyan and published by Oxford University Press. This book was released on 2012-11-08 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze determinants of sovereign bond yields in 22 advanced economies over the 1980-2010 period using panel cointegration techniques. The application of cointegration methodology allows distinguishing between long-run (debt-to-GDP ratio, potential growth) and short-run (inflation, short-term interest rates, etc.) determinants of sovereign borrowing costs. We find that in the long-run, government bond yields increase by about 2 basis points in response to a 1 percentage point increase in government debt-to-GDP ratio and by about 45 basis points in response to a 1 percentage point increase in potential growth rate. In the short-run, sovereign bond yields deviate from the level determined by the long-run fundamentals, but about half of the deviation adjusts in one year. When considering the impact of the global financial crisis on sovereign borrowing costs in euro area countries, the estimations suggest that spreads against Germany in some European periphery countries exceeded the level determined by fundamentals in the aftermath of the crisis, while some North European countries have benefited from safe haven flows.
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 An Empirical Analysis of the Dynamic Relationship Between Investment-grade Bonds and Credit Default Swaps by : Roberto Blanco
Download or read book An Empirical Analysis of the Dynamic Relationship Between Investment-grade Bonds and Credit Default Swaps written by Roberto Blanco and published by . This book was released on 2003 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: "In this paper the behaviour of credit default swaps (CDS) are analysed for a sample of firms and support found for the theoretical equivalence of CDS prices and credit spreads. When this is violated, the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. It is shown that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short run. Both markets equally reflect these factors in the long run, and this is primarily brought about by bond market adjustment"--Bank of England web site
Book Synopsis Sovereign Bond Prices, Haircuts and Maturity by : Mr.Tamon Asonuma
Download or read book Sovereign Bond Prices, Haircuts and Maturity written by Mr.Tamon Asonuma and published by International Monetary Fund. This book was released on 2017-05-22 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: Rejecting a common assumption in the sovereign debt literature, we document that creditor losses (“haircuts”) during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999–2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.
Book Synopsis The Empirical Relationship Between the Spreads of Credit Default Swaps and Bonds by : Ralf Koschmieder
Download or read book The Empirical Relationship Between the Spreads of Credit Default Swaps and Bonds written by Ralf Koschmieder and published by GRIN Verlag. This book was released on 2010-10 with total page 73 pages. Available in PDF, EPUB and Kindle. Book excerpt: Scientific Essay from the year 2010 in the subject Business economics - Investment and Finance, language: English, abstract: Warren Buffet, the world's richest man, once said that derivatives are financial "weapons of mass destruction." a term popularized by George W. Bush to describe nuclear arms. Indeed financial derivatives have a far greater impact on the market than their underlying due to their leverage effect. And the most popular and important credit derivatives nowadays are credit default swaps with a current notional value of over 60 trillion US dollars according to ISDA 1 (International Swaps and Derivatives Association) and 58 trillion US dollars according to BIS 2 (Bank for international settlement) respectively. That is more than the whole world's gross domestic product in the same year! 3 This paper examines the empirical relationship of CDS premium and credit spread by testing on their theoretical equivalence derived by Duffie (1999). It begins with an overview of CDS followed by the theoretical framework. The analysis starts with explanation of testing methods and description of data. After confirming the existence of the basis spread, this paper goes on to analyse the interactions of CDS spread and Bond spread using econometrics methods like Cointegration and Granger Causality tests. Also examined is the leadership of price discovery process between CDS market and traditional bond market.
Book Synopsis An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market by : Haibin Zhu
Download or read book An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market written by Haibin Zhu and published by . This book was released on 2013 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper compares the pricing of credit risk in the bond market and the fast-growing credit default swap (CDS) market. The empirical findings confirm the theoretical prediction that bond spreads and CDS spreads move together in the long run. Nevertheless, in the short run this relationship does not always hold. My study shows that the deviation is largely due to different responses of the two markets to changes in credit conditions. In particular, the CDS market appears to move ahead of the bond market in price discovery.
Book Synopsis An Empirical Analysis of the Dynamic Relationship Between Investment-grade Bonds and Credit Default Swaps by : Roberto Blanco Escolar
Download or read book An Empirical Analysis of the Dynamic Relationship Between Investment-grade Bonds and Credit Default Swaps written by Roberto Blanco Escolar and published by . This book was released on 2004 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyses the behaviour of credit default swaps (CDS) for a sample of firms and finds support for the theoretical equivalence of CDS prices and credit spreads. When this is violated, the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. The paper shows that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short run. Both markets equally reflect these factors in the long run, and this is primarily brought about by bond market adjustment.
Book Synopsis The Term Structure of CDS Spreads and Sovereign Credit Risk by : Patrick Augustin
Download or read book The Term Structure of CDS Spreads and Sovereign Credit Risk written by Patrick Augustin and published by . This book was released on 2018 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study the term structure of credit default swap spreads to understand the dynamics of global and country-specific risk factors in explaining the time-variation in sovereign credit risk. The analysis suggests that the shape of the term structure conveys significant information on the relative importance of global and domestic risk. When the spread curve is upward sloping, global shocks are the dominant force underlying changes in the price of sovereign credit risk. Nonetheless, domestic shocks become relatively more important when the term structure is inverted. To draw these conclusions, I develop a recursive preference-based model with long-run risk for credit default swaps. The underlying default process, which modulates expectations about future default probabilities, is modeled to depend both on global macroeconomic uncertainty and country-specific risk. Time-variation in the slope can be explained through the joint dynamics of aggregate and idiosyncratic shocks in connection with investor preferences. Additional supporting evidence of the model-implied results is provided by empirical analysis using a panel of 44 geographically dispersed countries. First, the variation in spreads explained by their first common component decreases during the sovereign debt crisis. Second, country-specific fundamentals explain relatively more spread variation of distressed countries, which are characterized through a downward sloping spread curve. Third, the explanatory power of domestic factors is monotonically increasing with the number of months the term structure was inverted. Overall, these findings support the view that both sources of risk are important, they simply matter at different points in time.
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 Are Credit Default Swaps Spreads High in Emerging Markets by : Mr.Manmohan Singh
Download or read book Are Credit Default Swaps Spreads High in Emerging Markets written by Mr.Manmohan Singh and published by International Monetary Fund. This book was released on 2003-12-01 with total page 9 pages. Available in PDF, EPUB and Kindle. Book excerpt: In times of distress when a country loses access to markets, there is evidence that credit default swap (CDS) spreads are a leading indicator for sovereign risk than the EMBI+ sub-index for the country. However, it is not easy to discern the variables that determine the level of CDS spreads in Emerging Markets (EM); traders only quote the CDS spreads and not the inputs that are required to calculate such spreads. This note provides some evidence from Argentina and Brazil that reveals inconsistency between theory and practice in pricing CDS spreads in EM. This note suggests an alternate methodology that links CTD (cheapest-to-deliver) bonds to recovery values assumed in CDS contracts. Furthermore, special features that pertain to CDS contracts (repo specialness, short squeezes by central banks) may also magnify the financial distress of a sovereign.
