Default Contagion and Systemic Risk in the Presence of Credit Default Swaps

24 Pages Posted: 1 Feb 2017 Last revised: 9 Apr 2017

Katsumasa Nishide

Graduate School of Economics, Hitotsubashi University

Teruyoshi Suzuki

Hokkaido Univeristy

Kyoko Yagi

Tokyo Metropolitan University

Date Written: April 7, 2017

Abstract

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

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

Katsumasa Nishide (Contact Author)

Graduate School of Economics, Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

HOME PAGE: http://www.econ.hit-u.ac.jp/~nishide/

Teruyoshi Suzuki

Hokkaido Univeristy ( email )

1-3 Ainosato 5-3
Kita-ku Sapporo, Hokkaido 002-8501
Japan

Kyoko Yagi

Tokyo Metropolitan University ( email )

1-1 Minami-Osawa
Hachioji, Tokyo 192-0397
Japan
+81-42-677-2308 (Phone)

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