The Pricing of Credit Default Swaps During Distress

November 1, 2006

Preview Citation

Format: Chicago

Manmohan Singh, and Jochen R. Andritzky The Pricing of Credit Default Swaps During Distress, (USA: International Monetary Fund, 2006) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Credit default swaps (CDS) provide the buyer with insurance against certain types of credit events by entitling him to exchange any of the bonds permitted as deliverable against their par value. Unlike bonds, whose risk spreads are assumed to be the product of default risk and loss rate, CDS are par instruments, and their spreads reflect the partial recovery of the delivered bond's face value. This paper addresses the implications of the difference between bond and CDS spreads and shows the extent to which the recovery assumption matters for determining CDS spreads. A no-arbitrage argument is applied to extract recovery rates from CDS and bond markets, using data from Brazil's distress in 2002-03. Results are related to the observation that preemptive restructurings are now more common than straight defaults in sovereign bond markets and that this leads to a decoupling of CDS and bond spreads.

Subject: Bonds, Credit, Credit default swap, Securities markets, Yield curve

Keywords: CDS contract, CDS market, CDS spread, Recovery value, WP

Publication Details

Pages:

23
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 2006/254
Stock No:

WPIEA2006254
ISBN:

9781451865141
ISSN:

1018-5941

FACTSHEETS

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers