Counterparty Credit Risk and the Credit Default Swap Market
14 Pages Posted: 6 May 2011 Last revised: 17 Dec 2012
Date Written: March 1, 2011
Abstract
Counterparty credit risk has become one of the highest-profile risks facing participants in the financial markets. Despite this, relatively little is known about how counterparty credit risk is actually priced. We examine this issue using an extensive proprietary data set of contemporaneous CDS transaction prices and quotes by 14 different CDS dealers selling credit protection on the same underlying firm. This unique cross-sectional data set allows us to identify directly how dealers’ credit risk affects the prices of these controversial credit derivatives. We find that counterparty credit risk is priced in the CDS market. The magnitude of the effect, however, is vanishingly small and is consistent with a market structure in which participants require collateralization of swap liabilities by counterparties.
Keywords: Counterparty Credit Risk, CDS
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Valuation in Over-the-Counter Markets
By Darrell Duffie, Nicolae Garleanu, ...
-
Valuation in Over-the-Counter Markets
By Nicolae Garleanu, Darrell Duffie, ...
-
Valuation in Over-the-Counter Markets
By Darrell Duffie, Nicolae Garleanu, ...