69 Pages Posted: 30 Sep 2016 Last revised: 10 Sep 2017
Date Written: August 7, 2017
We investigate how market participants price and manage counterparty 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 relatively low. Furthermore, we examine the impact of central clearing on CDS pricing. Contrary to the previous literature, but consistent with our main findings on pricing, we do not find that central clearing increases transaction spreads.
Keywords: Counterparty Credit Risk, Credit Default Swaps, Central Clearing
JEL Classification: G12, G13, G24
Suggested Citation: 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 (August 7, 2017). Available at SSRN: https://ssrn.com/abstract=2845567 or http://dx.doi.org/10.2139/ssrn.2845567