quantfinanceclub.com

The Link between Eurozone Sovereign  Debt and CDS Prices

Abstract

We perform a theoretical and empirical analysis of the relationship between the price of Eurozone sovereign-linked credit default swaps (CDS) and the same sovereign bond markets during the Eurozone debt crisis of 2009-2011. We first present a simple model which establishes the no-arbitrage relationship between CDS and bond yield spreads. We then test this relationship empirically and explain why the market may deviate from it. Reasons include the different currencies of denomination of market-standard CDS and their reference obligations. We also examine whether CDS spread cause changes in bond spreads, and vice-versa, in a Granger sense. We find evidence for a Granger causal relationship with a one day lag from CDS to bonds for Greece and Spain, the reverse relationship for France and Italy and a feedback relationship for Ireland and Portugal.

Link al Paper

(Fuente: Greek PSI: Questions & Answers, BNP Paribas, 22 February 2012)

(Fuente: BNP Paribas. Market Economics. 8 February 2012. Eurozone: Fiscal Update)

FT Alphaville tiene una muy buena serie de posts sobre un método (una subasta) por el cual se obtiene el monto definitivo que paga un CDS (si un evento de default ocurre).

To the extent that CDS are used to hedge, rather than speculate, the outcomes of these auctions will dictate how effective the hedge has been.

In this series, FT Alphaville looks at why the auction process was put in place, how it works, and why it may be biased — while discussing some rather curious cases along the way.

Aquí están los links los tres posts.

1. Why do they exist?
2. A necessary condition for growth
3. Mechanics

A CDS Option Miscellany

CDS options allow investors to express a view on spread volatility and obtain a wider range of payoffs than are possible with vanilla CDS. We give a detailed exposition of different types of single-name CDS option, including options with upfront protection payment, recovery options and recovery swaps, and also presents a new formula for the index option. The emphasis is on using the Black-76 formula where possible and ensuring consistency within asset classes. In the framework shown here the `armageddon event’ does not require special attention.

Link al Paper