EconPapers    
Economics at your fingertips  
 

Modeling optimal strategies in CDS markets: The role of creditor-issuer dynamics

Suman Banerjee and Mingyuan Kong

International Review of Financial Analysis, 2025, vol. 103, issue C

Abstract: We develop a model to analyze the optimal strategies of creditors and CDS issuers. By establishing conditions that ensure the reservation price of creditors exceeds that of the issuers, we demonstrate the existence of a CDS market. The difference between these reservation prices, influenced by factors such as risk aversion and fundamental uncertainty, plays a crucial role in shaping CDS market dynamics. We find that the issuer’s reservation price increases with the size of their equity position in the reference-entity, and decreases with the diversity of the issuer’s credit-risk portfolio. These findings have implications for the optimal design of CDS markets.

Keywords: Credit Default Swaps; CDS; Credit risk; Reference entity; Default premium; Insurance; CDS market dynamics (search for similar items in EconPapers)
JEL-codes: G22 G23 G32 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521925002571
Full text for ScienceDirect subscribers only

Related works:
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: https://EconPapers.repec.org/RePEc:eee:finana:v:103:y:2025:i:c:s1057521925002571

DOI: 10.1016/j.irfa.2025.104170

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2025-05-20
Handle: RePEc:eee:finana:v:103:y:2025:i:c:s1057521925002571