Counterparty Risk and Counterparty Choice in the Credit Default Swap Market

Wenxin Du (), Salil Gadgil, Michael B. Gordy () and Clara Vega ()
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Wenxin Du: Columbia Business School, New York, New York 10027
Michael B. Gordy: Federal Reserve Board, Washington, DC 20551
Clara Vega: Federal Reserve Board, Washington, DC 20551

Management Science, 2024, vol. 70, issue 6, 3808-3826

Abstract: We investigate how market participants price and manage counterparty credit risk using confidential trade repository data on single-name credit default swap (CDS) transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts but a large impact on the choice of counterparties. For contracts ineligible for central clearing, we show that market participants are significantly less likely to trade with counterparties whose credit risk is highly correlated with the credit risk of the reference entities and with counterparties whose credit quality is low. For clearable contracts, we find that nondealers are more likely to clear during a crisis and less likely to clear when the reference entity is a large U.S. dealer or a sovereign.

Keywords: counterparty credit risk; credit default swaps; central clearing; credit rationing; counterparty choice (search for similar items in EconPapers)
Date: 2024
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http://dx.doi.org/10.1287/mnsc.2023.4870 (application/pdf)

Related works:
Working Paper: Counterparty Risk and Counterparty Choice in the Credit Default Swap Market (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3808-3826

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