24 Pages Posted: 1 Feb 2017 Last revised: 9 Apr 2017
Date Written: April 7, 2017
We consider a clearing system of an interbank market in the case cross-ownerships of credit default swaps among banks are present, and investigate the effect of CDSs on market stability. The existence and uniqueness of a clearing payment vector is proved under the assumption of the fictitious default algorithm with financial covenants, which reflects technical defaults often observed in actual financial markets. Some numerical results are presented to show that in contrast to the previous literature, a complete network does not necessarily imply the most stable market when CDSs are introduced.
Keywords: credit default swap, default costs, default contagion, systemic risk
JEL Classification: G13, G32, G33, L14
Suggested Citation: Suggested Citation
Nishide, Katsumasa and Suzuki, Teruyoshi and Yagi, Kyoko, Default Contagion and Systemic Risk in the Presence of Credit Default Swaps (April 7, 2017). Available at SSRN: https://ssrn.com/abstract=2853258