How safe are central counterparties in credit default swap markets?

Mark Paddrick and H. Peyton Young

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We propose a general framework for estimating the vulnerability to default by a central counterparty (CCP) in the credit default swaps market. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the U.S. credit default swaps market under shocks that are similar in magnitude to the Federal Reserve’s stress tests. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.

Keywords: credit default swaps; central counterparties; stress testing; systemic risk; financial networks (search for similar items in EconPapers)
JEL-codes: D85 L14 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2021-01-01
New Economics Papers: this item is included in nep-cba, nep-cwa and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Mathematics and Financial Economics, 1, January, 2021, 15(1), pp. 41 - 57. ISSN: 1862-9679

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:101170

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