Economics at your fingertips  

Disentangling the bond–CDS nexus: A stress test model of the CDS market

Guillaume Vuillemey and Tuomas Peltonen ()

Economic Modelling, 2015, vol. 49, issue C, 32-45

Abstract: We present a stress test model for the CDS market, with a focus on the interplay between banks' bond and CDS holdings. The model enables us to analyse credit risk transfer mechanisms, features of market and liquidity risk, and features contagious propagation of counterparty failures. As an illustration, we calibrate the model using sovereign bond and CDS holdings data for 65 major European banks. The model simulation shows that, in case of a sovereign credit event, banks' losses due to direct and correlated bond exposures are significantly larger than losses due to CDS exposures. The main risk for CDS sellers is found to be sudden increases in collateral requirements on multiple correlated CDS exposures. Close-out netting considerably reduces the extent to which contagion may occur.

Keywords: Credit event; Credit default swap; Contagion; Collateral; Market risk; Liquidity risk; Stress test (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Disentangling the bond-CDS nexus: a stress test model of the CDS market (2013) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-10-23
Handle: RePEc:eee:ecmode:v:49:y:2015:i:c:p:32-45