Explaining Credit Default Swaps Pricing for Large Banks

Inci Ötker-Robe () and Jiri Podpiera

Journal of Financial Transformation, 2012, vol. 34, 63-75

Abstract: The credit default swap spread appears to be a potent predictor of financial distress, however, its determinants have not yet been fully understood. This paper suggests a banking-industry-specific approach to the pricing of banks’ credit risk. It shows that the pricing of banks’ credit default swap spreads could be approximated by a risk frontier derived from portfolio theory, where banks are viewed as leveraged portfolios. The commonly applied structural credit risk model adds very little to the explanatory power of the portfolio based approach, thereby underlying the importance of the new approach to banks’ credit risk.

Keywords: Credit default swaps; large complex financial institutions; CDS spread; distress; credit risk (search for similar items in EconPapers)
JEL-codes: G15 G21 G32 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1515

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