Restructuring Risk in Credit Default Swaps: An Empirical Analysis

32 Pages Posted: 17 Mar 2006 Last revised: 9 Aug 2014

See all articles by Antje Berndt

Antje Berndt

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

ChoongOh Kang

Citigroup Global Markets Japan Inc.

Date Written: December 28, 2006

Abstract

This paper estimates the price for restructuring risk in the U.S. corporate bond market during 1999-2005. Comparing quotes from default swap (CDS) contracts with a restructuring event and without, we find that the average premium for restructuring risk represents 6% to 8% of the swap rate without restructuring. We show that the restructuring premium depends on firm-specific balance-sheet and macroeconomic variables. And, when default swap rates without a restructuring event increase, the increase in restructuring premia is higher for low-credit-quality firms than for high-credit-quality firms. We propose a reduced-form arbitrage-free model for pricing default swaps that explicitly incorporates the distinction between restructuring and default events. A case study illustrating the model’s implementation is provided.

Keywords: credit default swaps, restructuring credit event, reduced-form credit risk modeling

JEL Classification: G13

Suggested Citation

Berndt, Antje and Jarrow, Robert A. and Kang, ChoongOh, Restructuring Risk in Credit Default Swaps: An Empirical Analysis (December 28, 2006). Available at SSRN: https://ssrn.com/abstract=891397 or http://dx.doi.org/10.2139/ssrn.891397

Antje Berndt

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics ( email )

Canberra, ACT 0200
Australia

HOME PAGE: http://www.cbe.anu.edu.au/about/staff-directory/?profile=Antje-Berndt

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

ChoongOh Kang (Contact Author)

Citigroup Global Markets Japan Inc. ( email )

Shin-Marunouchi Building
1-5-1 Marunouchi
Tokyo, 100-6520
Japan

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