This paper empirically analyzes the determinants of credit default swap (CDS) spreads from a sample of 45 listed European banks over the 2004-2010 period. We use variables related to accounting- and market-based data, an indicator of liquidity in the CDS market and several variables from the...

We examine recovery rates of the European banking sector. To this end, we employ information embedded in credit default swaps (CDS) with different levels of seniority. To estimate implied recovery rates, we extend the model of Schlafer and Uhrig-Homburg (2014) and include absolute priority...

Prior studies show that a lender's incentive to monitor a client's activities declines after receiving insurance on its loan via a credit default swap (CDS). We examine whether this altered debtor-creditor relation affects borrowers' investment activities. We hypothesize that the borrower...

Building on recent work incorporating recovery risk into structural models we consider the Black-Cox model with an added recovery risk driver. The recovery risk driver arises naturally in the context of imperfect information implicit in the structural framework. This leads to a two-factor...

In this work we incorporate recovery risk into Merton's original credit risk model by introducing a separate risk driver for the recovery process and rationalize this new model within a "partial information" perspective. We show that while adding the recovery risk driver has no impact on...

This article presents a comprehensive framework for valuing financial instruments subject to credit risk and collateralization. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats to financial markets. Some...

This paper studies the valuation of a class of default swaps with the embedded option to switch to a different premium and notional principal anytime prior to a credit event. These are early exercisable contracts that give the protection buyer or seller the right to step-up, step-down, or cancel...

Total notional principal outstanding for single-name credit default swaps (CDSs) based on corporate and sovereign reference entities grew significantly through June 2011, but, following the global credit crisis and Eurozone sovereign debt crisis, notional amounts on single-name CDSs outstanding...

This paper addresses the impact of developments in the credit risk transfer market on the viability of a group of systemically important financial institutions. We propose a bank default risk model, in the vein of the classic Merton-type, which utilizes a multi-equation framework to model...

While credit risk transfer market dramatically increases the complexity of lender's incentive structure and above all reduces the incentives of the bank to monitor debtor, a ‘harsh' bankruptcy environment (as evidenced in the shift from the debtor controlled to creditor controlled...