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The determinants of credit default swap spreads in the presence of structural breaks and counterparty risk

Kapar, B. and Olmo, J. (2011). The determinants of credit default swap spreads in the presence of structural breaks and counterparty risk (Report No. 11/02). London, UK: Department of Economics, City University London.

Abstract

By investigating the determinants of CDS spreads on European contracts before and after the recent crisis we observe significant differences in the explanatory power of market and firm-specific variables. Before the crisis, the underlying credit risk in the overall CDS market is sufficient to explain credit risk. During the crisis investors have a differing view on the risk of financial and non-financial contracts; whereas non-financial CDS contracts reflect the credit risk of the counterparty, financial contracts do not. Our results suggest that in case of default of financial firms, investors expect the government to intervene to alleviate credit risk of the counterparty and fears of systemic risk.

Publication Type: Monograph (Discussion Paper)
Additional Information: © 2011 the authors.
Publisher Keywords: co-integration, counterparty risk, credit default swaps, credit risk; iTraxx index
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics > Discussion Paper Series
URI: http://openaccess.city.ac.uk/id/eprint/1465
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