Do correlated defaults matter for CDS premia? An empirical analysis

Arbeitspapier

Correlated defaults and systemic risk are clearly priced in credit portfolio securities such as CDOs or index CDSs. In this paper we study an extensive CDX data set for evidence whether correlated defaults are also present in the underlying CDS market. We develop a cash flow based top-down approach for modeling CDSs from which we can derive the following major contributions: (I) Correlated defaults did not matter for CDS prices prior to the financial crisis in 2008. During and after the crisis, however, their importance has increased strongly. (II) In line with a plausible default order, we observe that correlated defaults primarily impact the CDS prices of firms with an overall low CDS level. (III) Idiosyncratic risk factors for each single CDS play a major (minor) role when the CDS premia are high (low).

Object Details

• ISBN: 978-3-95729-055-7
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bundesbank Discussion Paper ; No. 21/2014

Classification and Topics

• Classification: Wirtschaft ; Information and Market Efficiency; Event Studies; Insider Trading ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: Correlated Defaults ; Systemic Risk ; Idiosyncratic Risk ; Collateralized Debt Obligations ; Credit Default Swaps ; Credit Derivatives

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Koziol, Christian ; Koziol, Philipp ; Schön, Thomas
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/102298
• Last update: 10.03.2025, 11:45 AM CET