Abstract

http://ssrn.com/abstract=2192351
 
 

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Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk


Marti G. Subrahmanyam


New York University - Stern School of Business

Dragon Yongjun Tang


The University of Hong Kong

Sarah Qian Wang


University of Warwick; University of Warwick - Warwick Business School

December 21, 2012

HKIMR Working Paper No.29/2012

Abstract:     
Credit default swaps (CDS) are derivative contracts that are widely used as tools for credit risk management. However, in recent years, concerns have been raised about whether CDS trading itself affects the credit risk of the reference entities. We use a unique, comprehensive sample covering CDS trading of 901 North American corporate issuers, between June 1997 and April 2009, to address this question. We find that the probability of both a credit rating downgrade and bankruptcy increase, with large economic magnitudes, after the inception of CDS trading. This finding is robust to controlling for the endogeneity of CDS trading. Beyond the CDS introduction effect, we show that firms with relatively larger amounts of CDS contracts outstanding, and those with relatively more “no restructuring” contracts than other types of CDS contracts covering restructuring, are more adversely affected by CDS trading. Moreover, the number of creditors increases after CDS trading begins, exacerbating creditor coordination failure for the resolution of financial distress.

Number of Pages in PDF File: 68

Keywords: Credit Default Swaps, Credit Risk, Bankruptcy, Empty Creditor

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Date posted: December 22, 2012  

Suggested Citation

Subrahmanyam, Marti G. and Tang, Dragon Yongjun and Wang, Sarah Qian, Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk (December 21, 2012). HKIMR Working Paper No.29/2012. Available at SSRN: http://ssrn.com/abstract=2192351 or http://dx.doi.org/10.2139/ssrn.2192351

Contact Information

Marti G. Subrahmanyam
New York University - Stern School of Business ( email )
Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)
Dragon Yongjun Tang (Contact Author)
The University of Hong Kong ( email )
KKL 1005
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)
Sarah Qian Wang
University of Warwick ( email )
Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom
University of Warwick - Warwick Business School ( email )
Coventry CV4 7AL
United Kingdom
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References:  52
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