Credit Default Swap Spreads and Systemic Financial Risk

Posted: 13 Sep 2012  

Stefano Giglio

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: January 1, 2012

Abstract

This paper measures the joint default risk of financial institutions by exploiting information about counterparty risk in credit default swaps (CDS). A CDS contract written by a bank to insure against the default of another bank is exposed to the risk that both default together. From CDS spreads we can then learn about the joint default risk of pairs of banks. From bond prices, instead, we can learn the individual default probabilities. Since knowing individual and pairwise probabilities is not sufficient to fully characterize multiple default risk, I derive the tightest bounds on the probability that many banks fail simultaneously.

Suggested Citation

Giglio, Stefano, Credit Default Swap Spreads and Systemic Financial Risk (January 1, 2012). Chicago Booth Research Paper No. 12-45; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2145986

Stefano Giglio (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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