An Empirical Study of Credit Default Swaps

Frank Skinner () and Antonio Diaz
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Frank Skinner: ICMA Centre, University of Reading
Antonio Diaz: Associate Professor - Departamento de Economia y Empresa, Universidad de Castilla - La Mancha, Spain

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: We examine the pricing of Asian and non-Asian credit default swaps that traded during the 1997 to 1999 time period. We employ two credit risk models, Duffie and Singleton (1999) and Jarrow and Turnbull (1995). We argue that credit default swaps should have a positive economic value since credit spreads reflect differences in liquidity as well as credit risk. However, in the presence of moral hazard we expect to see negative economic values since asymmetric information would motivate sellers of credit default swaps to demand a 'restructuring premium'. While we generally find positive economic values for credit default swaps, both models find negative economic values for Asian credit default swaps during the recent Asian currency crisis, which we attribute to moral hazard.

Keywords: Credit default swaps; moral hazard; recovery rates; asymmetric information (search for similar items in EconPapers)
JEL-codes: G13 G22 G24 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2002-01, Revised 2003-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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