The Impact of Counterparty Risk on Credit Default Swap Pricing Dynamics

Item Type Journal paper
Abstract

As observed throughout the financial crisis in 2008 CDS contracts are not only exposed to the credit risk of the underlying reference entity but also to the counterparty risk of the protection seller. Conducting a panel regression analysis based on CDS contracts from 2004 to 2009 in Europe and North America for 198 reference entities we find that market-oriented counterparty risk measures are reflected in the pricing of CDS contracts. The impact of counterparty risk is decreasing with a higher creditworthiness of the underlying reference entity. We show that counterparty risk has been incorporated in the CDS spreads for North American reference entities already prior to the financial crisis, whereas for European reference entities the pricing impact only intensified with the outbreak of the financial crisis in September 2008. Market-based counterparty risk measures have a higher impact on the pricing of CDS contracts as compared to measures relying on the correlation structures of asset returns of reference entities and CDS counterparties.

Authors Morkötter, Stefan; Pleus, Johanna & Westerfeld, Simone
Journal or Publication Title Journal of Credit Risk
Language English
Subjects business studies
HSG Classification contribution to scientific community
Refereed Yes
Date 28 March 2012
Publisher Incisive Media
Place of Publication London
Volume 8
Number 1
Page Range 63-88
Number of Pages 26
ISSN 1744-6619
Depositing User Prof. Dr. Stefan Morkötter
Date Deposited 08 Nov 2011 15:37
Last Modified 23 Aug 2016 11:11
URI: https://www.alexandria.unisg.ch/publications/206952

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Citation

Morkötter, Stefan; Pleus, Johanna & Westerfeld, Simone (2012) The Impact of Counterparty Risk on Credit Default Swap Pricing Dynamics. Journal of Credit Risk, 8 (1). 63-88. ISSN 1744-6619

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https://www.alexandria.unisg.ch/id/eprint/206952
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