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Anticipating Credit Events Using Credit Default Swaps, with An Application to Sovereign Debt Crises

In reduced-form pricing models, it is usual to assume a fixed recovery rate to obtain the probability of default from credit default swap prices. An alternative credit risk measure is proposed here: the maximum recovery rate compatible with observed prices. The analysis of the recent debt crisis in...

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Bibliographic Details
Main Author: Chan-Lau, Jorge
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2003
Series:IMF Working Papers
Subjects:
Economic & Financial Crises & Disasters
Interest Rates
Credit
Finance
Financial Crises
Monetary Economics
Financial Services
Value Of Firms
Monetary Policy, Central Banking, And The Supply Of Money And Credit: General
Yield Curve
Money
International Financial Markets
Financial Risk Management
Credit Risk
Capital And Ownership Structure
Goodwill
Banks And Banking
Financial Regulation And Supervision
Credit Default Swap
Interest Rates: Determination, Term Structure, And Effects
Financial Risk And Risk Management
Financing Policy
Money And Monetary Policy
Financial Services Law & Regulation
Argentina
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
Description
Summary:In reduced-form pricing models, it is usual to assume a fixed recovery rate to obtain the probability of default from credit default swap prices. An alternative credit risk measure is proposed here: the maximum recovery rate compatible with observed prices. The analysis of the recent debt crisis in Argentina using this methodology shows that the correlation between the maximum recovery rate and implied default probabilities turns negative in advance of the credit event realization. This empirical finding suggests that the maximum recovery rate can be used for constructing early warning indicators of financial distress
Physical Description:20 pages
ISBN:9781451852912

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