Liquidity in Credit Default Swap Markets

Arakelyan, Armen; Serrano, Pedro

doi:10.1016/j.mulfin.2016.09.001

Cited by 18 publications

(17 citation statements)

References 32 publications

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“…On the quantitative side, our findings contrast the outcomes of Arakelyan and Serrano [20] for the period of 2004-2011, as authors find that, on average, the default risk premium Complexity accounts for 40% of CDS spreads. Our empirical data suggests that the default risk premium for BBB entities, on average, is below 20% of CDS spreads, as per the three top rows of Table 1.…”

Section: Results: Weights Of the Default Component Of Cds Spreadscontrasting

confidence: 99%

“…From qualitative point of view, our results are in line with outcomes of other researches on CDS spread components (Longstaff et al [29], Lin et al [34], Chen H. et al, and Arakelyan and Serrano [20]).…”

Section: Results: Weights Of the Default Component Of Cds Spreadssupporting

confidence: 91%

“…Herein we discuss the conceptual aspects of the abovementioned PD calibration aimed at distilling the pure default compensation part from CDS spread, as CDS spreads contain considerable nondefault component. We recommend for additional reading papers by Longstaff et al [29], Tang and Yan [30], Bongaerts et al [31], and Arakelyan and Serrano [20], which provide liquidity studies focused on the CDS market.…”

Section: Default Versus Nondefault Spread Componentmentioning

confidence: 99%

“…Additionally, the research paper by Arakelyan and Serrano [20], analyzing relatively recent data, assesses the fraction of the default component in CDS spreads within the period of 2004-2011. Still the main focus of this study is the liquidity component of CDS spreads.…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework

Gubareva

2019

Complexity

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The current expected loss calculations have recently attracted considerable attention in the research on credit risk modeling, impairment provisioning, and financial networks’ stability. A new CDS-based approach to estimate current expected credit loss is proposed for low default portfolios, containing credit exposures to corporate issuers covered by publicly traded CDS contracts. First, a fraction of CDS spread related to a pure default compensation for different CDS maturities is assessed. Our results contrast with previous research. Second, based on the obtained historical weights of the default risk premium, a forward-looking term structure of the probabilities of default implied by the current CDS quotes is derived. The proposed approach covers both investment and noninvestment grade debt. The resulting framework is applied to a sample of corporate bonds. The developed methodology provides a useful tool, on one hand, for credit risk managers and balance-sheet preparers and, on the other hand, for regulators of financial markets as it sheds light on how procyclicality could be avoided in provisions.

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Section: Results: Weights Of the Default Component Of Cds Spreadscontrasting

confidence: 99%

Section: Results: Weights Of the Default Component Of Cds Spreadssupporting

confidence: 91%

Section: Default Versus Nondefault Spread Componentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework

Gubareva

2019

Complexity

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“…This IG-HY segmentation e↵ect may also spill over from bond to CDS trading. A number of other studies, including Tang and Yan (2008), Chen, Fabozzi, and Sverdlove (2010), Bongaerts, de Jong, and Driessen (2011), Chen, Cheng, and Wu (2013), Junge and Trolle (2015) and Arakelyan and Serrano (2016), focus on the CDS market itself and document significant liquidity e↵ects. , Delianedis, Geske, and Corzo (1998), Bohn (2000) and Huang and Huang (2012) use structural approaches to estimating the relationship between actual and risk-neutral default probabilities, generally assuming that the Black-Scholes-Merton model applies to the asset value process, and assuming constant volatility.…”

Section: Introductionmentioning

confidence: 99%

Corporate Credit Risk Premia

Berndt

Douglas²,

Duffie

et al. 2018

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for research assistance, and to Linda Bethel and Sandra Berg for technical assistance. This paper is a comprehensive revision of our previous work, entitled "Measuring Default Risk Premia from Default Swap Rates and EDFs." The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w24213.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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The man in the middle—liquidity provision under central clearing in the credit default swap market: A regression discontinuity approach

Schoenemann

2021

Journal of Futures Markets

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In this study, I analyze the effect of central clearing on credit default swap (CDS) market breadth, depth, and resiliency using a regression discontinuity design. I find evidence for a decrease in absolute bid-ask spreads and bid-ask spread resiliency and an increase in gross trading volume with the beginning of central clearing. However, we observe positive effects of central clearing on CDS market liquidity only for CDS contracts of high fundamental and liquidity risk. Further results indicate that lower trading frictions, that is, counterparty risk and regulatory capital charges, may explain the positive effects of central clearing on CDS market liquidity.

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Liquidity in Credit Default Swap Markets

Cited by 18 publications

References 32 publications

Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework

Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework

Corporate Credit Risk Premia

The man in the middle—liquidity provision under central clearing in the credit default swap market: A regression discontinuity approach

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