Counterparty Risk and Counterparty Choice in the Credit Default Swap Market

72 Pages Posted: 30 Sep 2016 Last revised: 21 Feb 2019

See all articles by Wenxin Du

Wenxin Du

University of Chicago Booth School of Business

Salil Gadgil

University of California, Los Angeles (UCLA) - Anderson School of Management

Michael B. Gordy

Federal Reserve Board

Clara Vega

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: January 28, 2019

Abstract

We investigate how market participants price and manage counterparty credit risk in the post-crisis period using confidential trade repository data on single-name credit default swap (CDS) transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts, but a large impact on the choice of counterparties. We show that market participants are significantly less likely to trade with counterparties whose credit risk is highly correlated with the credit risk of the reference entities and with counterparties whose credit quality is low. Our results suggest that credit rationing may arise under wider circumstances than previously recognized.

Keywords: Counterparty Credit Risk, Credit Default Swaps, Central Clearing

JEL Classification: G12, G13, G24

Suggested Citation

Du, Wenxin and Gadgil, Salil and Gordy, Michael B. and Vega, Clara, Counterparty Risk and Counterparty Choice in the Credit Default Swap Market (January 28, 2019). Available at SSRN: https://ssrn.com/abstract=2845567 or http://dx.doi.org/10.2139/ssrn.2845567

Wenxin Du

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/wenxindu/

Salil Gadgil

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Michael B. Gordy

Federal Reserve Board ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3705 (Phone)

HOME PAGE: http://https://www.federalreserve.gov/econres/michael-b-gordy.htm

Clara Vega (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/research/staff/vegaclarax.htm

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