Effect of counterparty risk on CDS spreads during crisis.

We study the effect of counterparty risk on the credit default swap (CDS) spread. For our study, we use the 2008 subprime mortgage crisis period and the collapse of the Lehman Brothers which is a big counterparty during the crisis as a proxy for the effect of counterparty risk on the CDS spread. We...

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Main Authors: Teo, Gilbert Kwang Yong., Ng, Ronald Jia Sheng.
Other Authors: Nanyang Business School
Format: Final Year Project
Language:English
Published: 2013
Subjects:
Online Access:http://hdl.handle.net/10356/51586
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-515862023-05-19T06:24:06Z Effect of counterparty risk on CDS spreads during crisis. Teo, Gilbert Kwang Yong. Ng, Ronald Jia Sheng. Nanyang Business School Zhang Lei DRNTU::Business We study the effect of counterparty risk on the credit default swap (CDS) spread. For our study, we use the 2008 subprime mortgage crisis period and the collapse of the Lehman Brothers which is a big counterparty during the crisis as a proxy for the effect of counterparty risk on the CDS spread. We hypothesize that credit event involving a counterparty will enhance the effect of crisis on the CDS spread. To prove our hypothesis, we have used data of CDS holdings by bond funds in 2008 from the NQ-form and also day to day changes in CDS spread from Markit database. This phenomenon is further tested by looking at the industry factor; financial and non-financial industry, the depth of the market, which involves the number of dealers in the CDS market and also the credit rating of the reference entity. We found that the effect of crisis on CDS spread is magnified when Lehman Brothers is the counterparty, which shows that the credit event involving counterparty does affect the CDS spread. Also, this effect is larger for financial industry, market with lesser dealers and investment grade bonds with lower credit ratings. The robustness check that we have conducted proves that our results are consistent across different currencies and maturities. BUSINESS 2013-04-05T06:49:13Z 2013-04-05T06:49:13Z 2013 2013 Final Year Project (FYP) http://hdl.handle.net/10356/51586 en Nanyang Technological University 76 p. application/pdf
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
collection DR-NTU
language English
topic DRNTU::Business
spellingShingle DRNTU::Business
Teo, Gilbert Kwang Yong.
Ng, Ronald Jia Sheng.
Effect of counterparty risk on CDS spreads during crisis.
description We study the effect of counterparty risk on the credit default swap (CDS) spread. For our study, we use the 2008 subprime mortgage crisis period and the collapse of the Lehman Brothers which is a big counterparty during the crisis as a proxy for the effect of counterparty risk on the CDS spread. We hypothesize that credit event involving a counterparty will enhance the effect of crisis on the CDS spread. To prove our hypothesis, we have used data of CDS holdings by bond funds in 2008 from the NQ-form and also day to day changes in CDS spread from Markit database. This phenomenon is further tested by looking at the industry factor; financial and non-financial industry, the depth of the market, which involves the number of dealers in the CDS market and also the credit rating of the reference entity. We found that the effect of crisis on CDS spread is magnified when Lehman Brothers is the counterparty, which shows that the credit event involving counterparty does affect the CDS spread. Also, this effect is larger for financial industry, market with lesser dealers and investment grade bonds with lower credit ratings. The robustness check that we have conducted proves that our results are consistent across different currencies and maturities.
author2 Nanyang Business School
author_facet Nanyang Business School
Teo, Gilbert Kwang Yong.
Ng, Ronald Jia Sheng.
format Final Year Project
author Teo, Gilbert Kwang Yong.
Ng, Ronald Jia Sheng.
author_sort Teo, Gilbert Kwang Yong.
title Effect of counterparty risk on CDS spreads during crisis.
title_short Effect of counterparty risk on CDS spreads during crisis.
title_full Effect of counterparty risk on CDS spreads during crisis.
title_fullStr Effect of counterparty risk on CDS spreads during crisis.
title_full_unstemmed Effect of counterparty risk on CDS spreads during crisis.
title_sort effect of counterparty risk on cds spreads during crisis.
publishDate 2013
url http://hdl.handle.net/10356/51586
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