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

23 Pages Posted: 1 Feb 2017 Last revised: 31 Jan 2018

Katsumasa Nishide

Graduate School of Economics, Hitotsubashi University

Teruyoshi Suzuki

Hokkaido Univeristy

Kyoko Yagi

Tokyo Metropolitan University

Date Written: January 31, 2018

Abstract

We consider a clearing system of an interbank market in the case in which cross-trading of credit default swaps among banks is present, and we investigate the effect of credit default swaps 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 credit default swaps are introduced.

Keywords: credit default swap, default costs, cross-holding, clearing payment, 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 (January 31, 2018). Available at SSRN: https://ssrn.com/abstract=2853258 or http://dx.doi.org/10.2139/ssrn.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 )

1-4-1 Marunouchi
Chiyoda-ku, Tokyo 100-0005
Japan
+81-3-6268-0529 (Phone)

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