Download or read book The Impact of Credit Default Swaps on Corporate Capital Structure and Investment Policies written by Chunrong Wang and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit default swaps (CDSs) are credit derivatives whose primary purposes include hedging and the trading of credit risks. Unlike other derivatives, such as options or futures, CDSs materially alter lender-borrower relations and thus have real economic effects on the companies referenced by the CDSs. In this thesis, I explore the impact of CDS trading on the cost of capital, corporate capital structure, and corporate social responsibility. First, I use the universe of U.S. public firms to examine the impact of CDS trading on a firm's cost of capital during the period 2001 - 2018. My results robustly show that the inception of CDSs causes a significant reduction in a firm's weighted average cost of capital (WACC). Further analyses reveal that highly levered firms tend to reduce their debt weight, while firms with low leverage increase their usage of debt. Moreover, CDS referenced firms adjust their debt types by using more arm-length debts, while they simultaneously decrease the usage of revolving credits and term loans from banks. The alteration in capital financing choices may be ascribed to the improved information environment and reflects the fact that CDS trading increases debt renegotiation costs but simultaneously also reduces capital supply-side frictions. After confirming that CDS can impact firms' financing decisions, I further investigate whether CDS trading can affect a company's investment in corporate social and environmental activities. A longitudinal sample spanning from 2002 to 2017 across 11 countries and regions was constructed to evaluate the impact. I find that the inception of CDS trading causes a significant reduction in the metric of environmental emission reduction. In addition, the initiation of CDS trading weakly but negatively influences other aspects of CDS firms' social and environmental performance. Further analysis reveals that investments in emission reduction activities have no relationship to shareholder value creation, whereas engaging in CSR activities related to, e.g., employee, community, or eco-product innovation, etc., increases shareholder wealth. Collectively, my findings reveal one of the downsides of CDSs arising from CDS-protected lenders who become less accommodating over post-CDS periods.

Download or read book Credit Default Swap Trading Strategies written by Wolfgang Schöpf and published by diplom.de. This book was released on 2010-07-23 with total page 86 pages. Available in PDF, EPUB and Kindle. Book excerpt: Inhaltsangabe:Introduction: Credit default swaps are by far the most often traded credit derivatives and the credit default swap markets have seen tremendous growth over the past two decades. Put simply, a credit default swap is a tradeable contract that provides insurance against the default of a certain debtor. Initially, when the first form of a credit default swap (CDS) was traded in 1991, they were mainly used by commercial banks in order to lay off credit risk to insurance companies. However, focus shifted in the subsequent years as new players entered the market. Hedge funds became big players, money managers and reinsurers entered, and banks started to not only buy protection on their assets but also sell protection in order to diversify their portfolios. All this led to today s CDS market being dominated by investors rather than banks and, as a consequence, CDSs are now structured to meet investors needs instead of those of the banks. Over the same time as this shift to an investor orientated market took place, CDS markets grew at an astonishing rate with notional amount outstanding pretty much doubling every year until peaking in the second half of 2007 at USD 62,173.20 billions. The need to effciently transfer credit risk as well as the increasing standardization of CDS contracts by the International Swaps and Derivatives Association propelled this development. Only in 2008 did the notional amount outstanding in CDSs retract for the first time and come down to USD 31,223.10 billion in the first half of 2009. A partial reason was the full blown financial crisis in which CDSs also played a prominent role. The demise of Lehman Brothers, for example, triggered roughly USD 400 billion in protection payments and American International Group needed to be bailed out in 2008 because it had sold too much CDS protection. Amongst other concerns, these incidents highlight the systemic importance of CDSs. Combined with the phenomenal growth of CDS markets, this makes CDSs a highly relevant component of the current ?nancial environment and a fruitful subject for academic research. Today, just like most other financial instruments, CDSs serve a multitude of purposes spanning hedging, speculation, and arbitrage. The aim of this thesis is to explore these uses further and answer the following research questions: What CDS trading strategies are commonly used and how does a selection of these strategies CDS curve trades including forward CDSs, [...]

Download or read book The Impacts of Credit Default Swaps on Debt Pricing Corporate Investment and Dividend Policy written by Yulin Wu and published by . This book was released on 2018 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Credit Default Swaps written by Christopher L. Culp and published by Springer. This book was released on 2018-07-12 with total page 331 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book, unique in its composition, reviews the academic empirical literature on how CDSs actually work in practice, including during distressed times of market crises. It also discusses the mechanics of single-name and index CDSs, the theoretical costs and benefits of CDSs, as well as comprehensively summarizes the empirical evidence on important aspects of these instruments of risk transfer. Full-time academics, researchers at financial institutions, and students will benefit from the dispassionate and comprehensive summary of the academic literature; they can read this book instead of identifying, collecting, and reading the hundreds of academic articles on the important subject of credit risk transfer using derivatives and benefit from the synthesis of the literature provided.

Download or read book Credit Default Swaps written by Marti Subrahmanyam and published by Now Publishers. This book was released on 2014-12-19 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit Default Swaps: A Survey is the most comprehensive review of all major research domains involving credit default swaps (CDS). CDS have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly since the credit crisis of 2007-2009. The authors review the extant literature on CDS that has accumulated over the past two decades and divide the survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles, structural, and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the bond and equity markets, with an emphasis on market efficiency, price discovery, information flow, and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and corporate governance. The sixth section analyzes how CDS impact the economic incentives of financial intermediaries. The seventh section reviews the growing literature on sovereign CDS and highlights the major differences between the sovereign and corporate CDS markets. The eighth section discusses CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. The authors close with our suggestions for promising future research directions on CDS contracts and markets.

Download or read book Credit Default Swaps Pricing Valuation and Investment Applications written by Panagiotis Papadopoulos and published by GRIN Verlag. This book was released on 2011-04 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seminar paper from the year 2010 in the subject Business economics - Investment and Finance, grade: 67%, University of Westminster (Westminster Business School), course: Financial Derivatives, language: English, abstract: "A credit default swap (CDS) is a bilateral agreement designed explicitly to shift credit risk between two parties. In a CDS, one party (protection buyer) pays a periodic fee to another party (protection seller) in return for compensation for default (or similar credit event) by a reference entity". Credit Default Swaps (CDS) are by far the most popular credit derivatives and have proven to be the most successful financial innovation. The structure of CDS is somewhat similar to the insurance policy. The market of CDS has heavily expanded and is traded in Over-The-Counter (OTC) market. This essay will briefly address the structure and the market of CDS, outlining its common products usage by some large institutions. Following the review of financial structure and pricing of CDS. And finally, this essay will also evaluate the risk management and investment applications of such products.

Download or read book The Role of Credit Default Swaps in Leveraged Finance Analysis written by Robert S. Kricheff and published by FT Press. This book was released on 2012-10-22 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: Normal 0 false false false MicrosoftInternetExplorer4 Credit Default Swaps (CDS) influence how bonds and loans trade and the relative value between bonds and loans. CDS can be the best way to hedge the risk of a corporate debt position and can also be a valuable investment tool in its own right. CDS has a multitude of nuances to it, from how its structured to how it is priced to how it is traded. If you are going to do analysis of corporate debt, especially in the leveraged finance market, you need to understand CDS. This booklet walks you through the basics of how CDS works, gives some perspective on how it has changed since the 2008 crisis and gives practical examples of how CDS is used and analyzed for corporate issuers. It is a valuable summary for anyone looking to do corporate credit analysis.

Download or read book Investing in Corporate Bonds and Credit Risk written by F. Hagenstein and published by Springer. This book was released on 2004-10-01 with total page 355 pages. Available in PDF, EPUB and Kindle. Book excerpt: Investing in Corporate Bonds and Credit Risk is a valuable tool for any corporate bond investor. All the most recent developments and strategies in investment in corporate bonds are analyzed included with qualitative and quantitative approaches. A complete and up-to-date investment process is developed through the book, using many examples taken from banking practice. The growing significance of derivative instruments and credit diversification to bond investors is also analyzed in detail.

Download or read book The Credit Default Swap Basis written by Moorad Choudhry and published by Bloomberg Press. This book was released on 2027-06-22 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: An up-to-date resource on the intricacies of the credit default swap basis While credit default swaps and credit derivatives are of great concern to many in the field of finance, the Second Edition of The Credit Default Swap Basis does not directly focus on these issues. It is instead about an aspect of CDS behavior, the basis, which is of importance to all users of CDS products. An understanding of the basis is essential to anyone involved in the credit-risky debt capital markets, whether you're an investor, trader, or broker. The credit default swap basis (the basis) defines the relationship between the cash and synthetic credit markets. Finance professionals need to understand the drivers of the basis in order to better undertake investment and value analysis, and for trading purposes. In this updated Second Edition, author Moorad Choudhry, a market practitioner who has published widely in the field of credit derivatives, explores this dynamic discipline and examines the structural changes in the CDS market, including new settlement mechanisms and contract standardization. Along the way, he describes how basis pricing has changed in the aftermath of the financial crisis and what that change means in regard to overall market and trading opportunities. The only book on basis issues of credit default swaps, it provides practitioners with vital information on valuation, credit risk assessment, and basis trading strategies Addresses structural changes to the market, including the introduction of central clearing houses in the U.S. and Europe and standardization of contracts to reduce disputes about payout settlements Covers the close relationship between the synthetic and cash markets in credit, which manifests itself in the credit default swap basis The Credit Default Swap Basis, Second Edition offers invaluable market insights to all financial professionals seeking a deeper understanding of credit derivatives and fixed income securities.

Download or read book Essays on Credit Default Swaps and Corporate Debt Financing Decisions written by R. Matthew Darst and published by . This book was released on 2015 with total page 205 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract : The chapters of this dissertation examine the influence credit default swaps (CDS) have a number of different corporate debt financing outcomes. Chapter Two studies the effects CDS have on firm financing in a general equilibrium production economy with heterogeneous firms. Covered CDS lower borrowing costs for all firms even when CDS contracts are traded on only one firm type. This leads to higher investment levels in the economy, but raises the likelihood of default when productivity shocks are bad. Naked CDS raise borrowing costs for all firms even when CDS contracts trade on a single firm type. This lowers investment levels in the economy, and lowers the likelihood of default. Lastly, we show that both Covered and Naked CDS induce borrowing cost spillovers to all firm types even when CDS do not exist for all firm types.Chapter Three investigates the effects that CDS have on the term-structure of corporate bonds. I find that covered CDS tend to lengthen average debt maturity which is consistent with recent empirical work. Covered CDS lower borrowing costs, the benefits of which become consolidated at the time of issuance when the firm issues long term debt rather than a sequence of short term bonds, which exposes the firm to bond price updating. Additionally, naked CDS may shorten average debt maturity and create “maturity mis-match” in corporate debt markets. Naked CDS raise borrowing costs which also become consolidated at the time of issuance when firms issue long term debt rather than short term bonds, and incentivizes the firm to issue risky short term debt. Furthermore, naked CDS may destroy equilibrium whenever firms issue short term debt.Chapter Four tests whether trading in CDS markets lead to borrowing cost spillovers across firms that are not named reference entities in CDS transactions. General equilibrium models of firm financing with CDS suggest that collateralized CDS contracts may reallocate capital away from bond markets and into derivative markets. We find evidence, conditional on firm rating, that the introduction of CDS affects the cost of issuing bonds for firms who are not single-named CDS reference entities. Borrowing costs for investment-grade firms increase, whereas borrowing costs for high-yield firms decrease when CDS are introduced for equivalently rated firms. We attribute the difference in borrowing costs across ratings classes due to differences in how CDS affect the liquidity of investment-grade versus high-yield corporate bonds. Various robustness checks are conducted for the endogeneity of both CDS introduction and bond issuance.

Download or read book Credit Default Swaps Around the World written by Söhnke M. Bartram and published by . This book was released on 2019 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the impact of the introduction of credit default swaps (CDS) on real decision making within the firm, taking into consideration differences in firms' local economic and legal environments. We extend the model of Bolton and Oehmke (2011) to take into account uncertainty whether the actions taken by the reference entity will trigger credit events for the CDS obligations. We test the predictions of the model in a sample of more than 56,000 firms across 50 countries over the period 2001-2015 and find substantial evidence that the introduction of CDS affects real decisions within the firm, including those regarding leverage, investment, and the riskiness of the firm's investments. Importantly, we find that the legal and market environments in which the reference entity operates have an influence on the impact of CDS. The effect of CDS is larger in environments where uncertainty regarding CDS obligations is reduced and where CDS mitigate weak property rights. Our results shed light on the incomplete nature of CDS contracts in international capital markets, related to significant legal uncertainty surrounding the interpretation of underlying credit events.

Download or read book The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions written by Jiri Podpiera and published by International Monetary Fund. This book was released on 2010-06-01 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.

Download or read book How Efficient are Credit Default Swap Markets An Empirical Study of Capital Structure Arbitrage Based on Structural Pricing Models written by Björn Imbierowicz and published by . This book was released on 2008 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the efficiency of the credit default swap (CDS) market via the profitability and risk of capital structure arbitrage strategies based on observed mispricing in the CDS market over the years 2002 to 2006. We find that the CDS market has been inefficient in our observation period although this inefficiency declined over time. For this purpose, we calculate CDS premiums by means of the CreditGrades (2002) model and the models of Leland and Toft (1996) and Zhou (2001) and apply those within a capital structure arbitrage context for a dataset covering more than 800,000 observations. Our results indicate that structural credit risk models can adequately replicate market spreads but still produce significant positive arbitrage returns within our strategy. This also holds when transaction costs are incorporated. Accounting for risk via the Sharpe ratio reveals that the CDS market was inefficient at the beginning of our sample period but became efficient in the years 2004/2005 consistent with soaring trading volumes and the introduction of CDS index trading at this time. We are also able to show that the mathematically more advanced Leland and Toft and Zhou models provide larger arbitrage returns within our strategy. Considering rating classes, the arbitrage returns increase as obligors become riskier, in line with standard investment theory.

Download or read book The COVID 19 Impact on Corporate Leverage and Financial Fragility written by Sharjil M. Haque and published by International Monetary Fund. This book was released on 2021-11-05 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the impact of the COVID-19 recession on capital structure of publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, while firms whose businesses were most vulnerable to social distancing did not reduce leverage. We rationalize our evidence through a structural model of firm value that shows lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage. Model-implied optimal leverage indicates firms which did not de-lever became over-leveraged. We find default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID. Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.

Download or read book Impact of Interest Rate Swaps on Corporate Capital Structure written by Jian Yang and published by . This book was released on 2003 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: Interest rate swaps are the most popular financial derivatives used by US firms. In this paper, the effects of swap usage on corporate financing decisions are empirically examined. Based on a dynamic capital structure theoretical model, we employ a seemingly unrelated regression model with a heteroscedasticity-consistent covariance estimator to estimate these effects. The empirical results show that the firms with higher effective tax rates reduce their optimal debt ratio range when they use interest rate swaps. We also found that the swap users may enlarge the influence of firm size on corporate dynamic debt policy, though it was not clear that it helped reduce or increase the optimal debt ratio range. No effect of swaps usage on the optimal debt ratio range was found related to bankruptcy costs and the volatility of income. The findings imply that the use of swaps can help firms stick to an initial high debt ratio and make more use of the large tax benefits of debts on debt financing decisions.

Download or read book Risk and Return of Capital Structure Arbitrage with Credit Default Swap CDS written by Yuchen Luo and published by . This book was released on 2008 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study also contributes to the literature on information flows across markets by providing economically significant evidence that information flows from stock and options markets to CDS market.

Download or read book Essays on the Impact of Credit Default Swaps on Corporate Debt written by Md Ehraz Refayet and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: