Counterparty Risk and Counterparty Choice in the Credit Default Swap Market

Wenxin Du, Salil Gadgil, Michael Gordy and Clara Vega

No 2016-087, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We investigate how market participants price and manage counterparty risk in the post-crisis period using confidential trade repository data on single-name credit default swap (CDS) transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts, but a large impact on the choice of counterparties. We show that market participants are significantly less likely to trade with counterparties whose credit risk is highly correlated with the credit risk of the reference entities and with counterparties whose credit quality is relatively low. Furthermore, we examine the impact of central clearing on CDS pricing. Contrary to the previous literature, but consistent with our main findings on pricing, we find no evidence that central clearing increases transaction spreads.

Keywords: Counterparty credit risk; Credit default swaps; Central clearing (search for similar items in EconPapers)
JEL-codes: G12 G13 G24 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2016-09-08
New Economics Papers: this item is included in nep-ban and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.federalreserve.gov/econresdata/feds/2016/files/2016087pap.pdf (application/pdf)

Related works:
Journal Article: Counterparty Risk and Counterparty Choice in the Credit Default Swap Market (2024)
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:fip:fedgfe:2016-87

DOI: 10.17016/FEDS.2016.087

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().