The risk management implications of using end of day consensus pricing for single name CDS

Tavy Ronen (), Oleg Sokolinskiy () and Ben Sopranzetti ()
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Tavy Ronen: Rutgers Business School: Newark and New Brunswick
Oleg Sokolinskiy: Rutgers Business School: Newark and New Brunswick
Ben Sopranzetti: Rutgers Business School: Newark and New Brunswick

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 1, No 9, 269-304

Abstract: Abstract When markets are opaque, market participants rely to a large extent on end-of-day consensus prices published by service providers; such as in the case of the single name credit default swaps (CDS) market. End-of-day consensus CDS prices are critical for valuation and risk management purposes, since profits and losses of inventory positions can be determined by marking to market using end-of-day consensus prices. Deviations between end-of-day prices and intraday quotes can occur due to many factors, including market illiquidity. This paper identifies determinants of such deviations, lays out the times when they can occur, and examines the impact of these deviations for risk management purposes. End-of-day consensus prices are representative of average and median intraday quotes; however, in periods of high volatility and market distress, end-of-day prices can notably differ from actual intraday quotes. Such analysis can allow market participants to better rely on end-of-day consensus prices during normal market conditions.

Keywords: Credit default swaps; Consensus pricing; Risk management; Default risk (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G13 G17 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11156-019-00843-2

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