Do correlated defaults matter for CDS premia? An empirical analysis

Christian Koziol (), Philipp Koziol and Thomas Schön ()

Review of Derivatives Research, 2015, vol. 18, issue 3, 224 pages

Abstract: Correlated default factors and systemic risk are clearly priced in credit portfolio securities such as CDOs or index CDSs. In this paper we study an extensive CDX data set for evidence of whether correlated default factors are also present in the underlying CDS market. We develop a cash-flow-based top-down approach for modeling CDSs from which we can derive the following major contributions: (1) Correlated default factors did not matter for CDS prices prior to the financial crisis in 2008. During and after the crisis, however, their importance increased strongly. (2) We observe that correlated default factors primarily impact on the CDS prices of firms with an overall low CDS level. (3) Idiosyncratic risk factors for each single CDS play a major (minor) role when the CDS premia are high (low). Copyright European Union 2015

Keywords: Correlated defaults; Systemic risk; Idiosyncratic risk; Collateralized debt obligations; Credit default swaps; Credit derivatives; G14; G21 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:revdev:v:18:y:2015:i:3:p:191-224

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DOI: 10.1007/s11147-015-9109-4

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