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Contingent Convertible Bonds with the Default Risk Premium

Jang, Hyun Jin - 2018

Contingent convertible bonds (CoCos) are hybrid instruments characterized by both debt and equity. CoCos are automatically converted into equity or written down when a predefined trigger event occurs. The present study quantifies the issuing bank's default risk that only manifests in the...

Persistent link: https://www.econbiz.de/10012915501

Debt Dynamics and Default Probabilities

Hackbarth, Dirk - 2020

We derive a simple integral equation for the default probability over a finite time horizon of a company that makes coupon payments on its debt and infrequently returns to its leverage target by increasing its debt unless it defaults on its debt. Compared to the conventional (constant default...

Persistent link: https://www.econbiz.de/10012846065

Counterparty Risk and Contingent CDS Valuation Under Correlation Between Interest-Rates and Default

Brigo, Damiano; Pallavicini, Andrea - 2008

We consider counterparty risk for interest rate payoffs in presence of correlation between the default event and interest rates. The previous analysis of Brigo and Masetti (2006), assuming independence, is further extended to interest rate payoffs different from simple swap portfolios. A...

Persistent link: https://www.econbiz.de/10014056259

The Inevitability of Market-Wide Underpricing of Mortgage Default Risk

Pavlov, Andrey D.; Wachter, Susan M. - 2012

Lenders are frequently accused of mispricing the put option imbedded in non-recourse lending (Herring and Wachter, 1999 and 2003). Prior research (Pavlov and Wachter, 2004) shows one lender's incentives to underprice. Here we identify the conditions for a market-wide underpricing equilibrium. We...

Persistent link: https://www.econbiz.de/10014057396

Default Contagion in a Two-Tree Economy

Ericsson, Jan; Jeanneret, Alexandre; Lu, Yiliu - 2021

We propose an explanation for default contagion based on a Lucas model with two independent debt-financed trees. The transmission mechanism is that variations in the size of one tree impact the level of risk premium and the default decision for all borrowers. If a negative shock hits one tree,...

Persistent link: https://www.econbiz.de/10013229878

Liquidity risk in credit default swap markets

Junge, Benjamin; Trolle, Anders B. - 2013

We show that liquidity risk is priced in the cross section of returns on credit default swaps (CDSs). We measure CDS … constituents' CDS spreads, and we construct a tradable liquidity factor from returns on index arbitrage strategies. CDS contracts … with higher liquidity exposures have higher expected excess returns for sellers of credit protection and trade with wider …

Persistent link: https://www.econbiz.de/10010258589

Dangers of Bilateral Counterparty Risk : The Fundamental Impact of Closeout Conventions

Brigo, Damiano - 2011

In this paper we focus on a fundamental practical issue regarding the bilateral counterparty risk adjustment. The past literature assumes that, at the moment of the first default, a risk-free closeout amount will be used. The closeout amount is the net present value of the residual deal which is...

Persistent link: https://www.econbiz.de/10013132522

The Impact of Margin Interest on the Valuation of Credit Default Swaps

Kan, Yu Hang (Gabriel) - 2012

Virtually all credit default swaps (CDS) are collateralized with a daily cash settlement of the variation margin equal to the change in their mark-to-market values. We show how the interest on the variation margin (also called price alignment interest) affects the value of CDS. Specifically, we...

Persistent link: https://www.econbiz.de/10013115140

The Impact of Liquidity on Senior Credit Spreads During the Subprime Crisis

Marra, Miriam - 2013

This paper examines the effects of liquidity during the 2007-09 crisis, focussing on the senior tranche of the CDX …-capital, and liquidity preference exhibited by investors. Using cointegration analysis, the paper shows that during the crisis … lower market and funding liquidity and higher investors' risk-aversion are important drivers of the increase in the spread …

Persistent link: https://www.econbiz.de/10013084230

The Impact of Central Clearing on Counterparty Risk, Liquidity, and Trading : Evidence from the Credit Default Swap Market

Loon, Yee Cheng - 2013

improvement in liquidity and trading activity …

Persistent link: https://www.econbiz.de/10013089648