Credit Default Swap Spreads and Systemic Financial Risk
Stefano W. Giglio
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
January 1, 2012
Chicago Booth Research Paper No. 12-45
Fama-Miller Working Paper
This paper measures the joint default risk of financial institutions by exploiting information about counterparty risk in credit default swaps (CDS). A CDS contract written by a bank to insure against the default of another bank is exposed to the risk that both default together. From CDS spreads we can then learn about the joint default risk of pairs of banks. From bond prices, instead, we can learn the individual default probabilities. Since knowing individual and pairwise probabilities is not sufficient to fully characterize multiple default risk, I derive the tightest bounds on the probability that many banks fail simultaneously.
Date posted: September 13, 2012
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollobot1 in 0.203 seconds