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Interest Rate Swap Valuation since the Financial Crisis: Theory and Practice 金融危机以来的利率互换估值:理论与实践
ERN: Swaps & Forwards (Topic) Pub Date : 2017-06-01 DOI: 10.2139/ssrn.2912346
Ira G. Kawaller, Donald J. Smith
{"title":"Interest Rate Swap Valuation since the Financial Crisis: Theory and Practice","authors":"Ira G. Kawaller, Donald J. Smith","doi":"10.2139/ssrn.2912346","DOIUrl":"https://doi.org/10.2139/ssrn.2912346","url":null,"abstract":"The financial crisis of 2007-09 revealed the importance of counterparty credit risk in the valuation of non-collateralized interest rate swaps. In theory, these valuations rest on assumed default probabilities and recovery rates. These assumptions, however, should be reflected in the risk-adjusted discount rates of the counterparties. Thus, in practice, swap valuations can be generated by discounting prospective swap settlements using risk-adjusted discount rates, cash flow by cash flow. This article demonstrates this method, discerning risk-adjusted discount rates from data that are readily available on the Bloomberg information system. Critically, if the inputs for the two methodologies are mutually consistent, theory and practice should yield identical valuations.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129970091","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 0
The Value of Trading Relationships and Networks in the CDS Market CDS市场中交易关系和网络的价值
ERN: Swaps & Forwards (Topic) Pub Date : 2017-03-27 DOI: 10.2139/ssrn.2901743
Diana A. Iercosan, Alexander Jiron
{"title":"The Value of Trading Relationships and Networks in the CDS Market","authors":"Diana A. Iercosan, Alexander Jiron","doi":"10.2139/ssrn.2901743","DOIUrl":"https://doi.org/10.2139/ssrn.2901743","url":null,"abstract":"We investigate execution quality issues in the OTC single-name credit default swap (CDS) market using confidential transactions-level trade repository data. Specifically, we analyze the impact of counterparties’ matching and negotiation abilities on the terms of trade of CDS contracts, under incomplete information about market liquidity and quotes. We show that execution cost of a CDS transaction, measured as the deviation of the traded CDS spread from the market consensus spread, is explained, in part, by the counterparties’ trading activity level, trading networks, and trading relationships. Further, we test the importance of these determinants of execution cost under stressed market conditions, such as a crisis regime, low trading volume and high market volatility.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"96 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-03-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121604543","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 8
Credit Default Swaps and Earnings Management 信用违约掉期和收益管理
ERN: Swaps & Forwards (Topic) Pub Date : 2017-02-28 DOI: 10.2139/ssrn.2926264
Nan Hu, Ronghong Huang, Ruirui Fang
{"title":"Credit Default Swaps and Earnings Management","authors":"Nan Hu, Ronghong Huang, Ruirui Fang","doi":"10.2139/ssrn.2926264","DOIUrl":"https://doi.org/10.2139/ssrn.2926264","url":null,"abstract":"In this study, we examine the association between the initiation of credit default swaps (CDS) trading and firms’ earnings management behavior. Since CDS contracts help creditors transfer credit risk, creditors tend to be tough in debt renegotiations. Anticipating tough creditors, CDS firms may be forced to manage earnings upward to avoid debt renegotiations rather than deflate earnings to extract covenant claim concessions from creditors. Consistent with our expectation, we find that the introduction of CDS trading is positively associated with firms’ income-increasing discretionary accruals. Our findings remain robust after we control for the endogeneity of CDS trading using the propensity-score matching method, the placebo test, and the two-stage instrumental variable approach. Furthermore, we find that the positive association between CDS initiation and discretionary accruals is more pronounced for firms with tighter financial constraints and poorer information environment. We also find that CDS initiation is negatively associated with firms’ real earnings management activities, suggesting that firms substitute the less costly accrual-based earnings management for the more costly real earnings management after CDS-initiation. Overall our study suggests that firms respond to the “empty creditor problem” created by CDS trading through earnings management tools.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126473557","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 2
The Swap Market Model with Local Stochastic Volatility 局部随机波动的掉期市场模型
ERN: Swaps & Forwards (Topic) Pub Date : 2017-02-08 DOI: 10.2139/ssrn.2912558
Kenji Oya
{"title":"The Swap Market Model with Local Stochastic Volatility","authors":"Kenji Oya","doi":"10.2139/ssrn.2912558","DOIUrl":"https://doi.org/10.2139/ssrn.2912558","url":null,"abstract":"The aim of this paper is to present the multi-factor swap market model with non-parametric local volatility functions and stochastic volatility scaling factors. We provide a Dupire-like formula with which calibration can be carried out with the particle algorithm in an efficient manner. We also discuss how the calibration method can be made applicable in the context of Libor Market Model. We show high accuracy of our calibration algorithm by numerical experiments.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"140 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133546700","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 3
Bond and CDS Pricing with Recovery Risk II: The Stochastic Recovery Black-Cox Model 考虑恢复风险的债券和CDS定价II:随机恢复Black-Cox模型
ERN: Swaps & Forwards (Topic) Pub Date : 2017-01-24 DOI: 10.2139/ssrn.2579345
Albert Cohen, Nick Costanzino
{"title":"Bond and CDS Pricing with Recovery Risk II: The Stochastic Recovery Black-Cox Model","authors":"Albert Cohen, Nick Costanzino","doi":"10.2139/ssrn.2579345","DOIUrl":"https://doi.org/10.2139/ssrn.2579345","url":null,"abstract":"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 structural model we call the Stochastic Recovery Black-Cox model, whereby the asset risk driver At defines the default trigger and the recovery risk driver Rt defines the amount recovered in the event of default. We then price zero-coupon bonds and credit default swaps under the Stochastic Recovery Black-Cox model. Introducing separate but correlated risk drivers leads to a decoupling of the default and recovery risk premiums in the credit spread. Finally, we compare our results with the classic Black-Cox model and give explicit expressions for the recovery risk premium in the Stochastic Recovery Black-Cox model.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115378606","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 2
Par-Par Asset Swap Spreads: An Illustration of How to Price Asset Swaps 平价资产掉期价差:如何为资产掉期定价的说明
ERN: Swaps & Forwards (Topic) Pub Date : 2016-12-03 DOI: 10.2139/ssrn.2809111
N. Burgess
{"title":"Par-Par Asset Swap Spreads: An Illustration of How to Price Asset Swaps","authors":"N. Burgess","doi":"10.2139/ssrn.2809111","DOIUrl":"https://doi.org/10.2139/ssrn.2809111","url":null,"abstract":"Asset swaps provide a form of asset financing, where investors borrow funds to purchase an asset, typically a bond. Asset swaps are also a good bond rich-cheap analysis tool. Such swaps can of course be used for speculative purposes. In this paper we provide a brief overview of asset swaps and derive a par-par asset swap spread formula incorporating bond accrued interest. Finally we illustrate how to calculate both the yield-yield and par-par asset swap spread using the liquid 10 year German Bund.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127934844","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 0
Measuring Abnormal Credit Default Swap Spreads 衡量异常信用违约互换价差
ERN: Swaps & Forwards (Topic) Pub Date : 2016-01-22 DOI: 10.2139/ssrn.2194320
C. Andres, A. Betzer, Markus Doumet
{"title":"Measuring Abnormal Credit Default Swap Spreads","authors":"C. Andres, A. Betzer, Markus Doumet","doi":"10.2139/ssrn.2194320","DOIUrl":"https://doi.org/10.2139/ssrn.2194320","url":null,"abstract":"This paper examines the size and power of test statistics designed to detect abnormal changes in credit risk as measured by credit default swap (CDS) spreads. We follow a simulation approach to examine the statistical properties of normal and abnormal CDS spreads and assess the performance of normal return models and test statistics. Using daily CDS data, we find parametric test statistics to be generally inferior to non-parametric tests, with the rank test performing best. A CDS factor model based on factors identified in the empirical literature is generally well specified and more powerful in detecting abnormal performance than some of the classical normal return models. Finally, we examine abnormal CDS announcement returns around issuer's rating downgrades to demonstrate the effect of CDS spread change measures and normal return models on the inferences drawn from the results of CDS event studies.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-01-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131196886","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 18
The ABCD of Interest Rate Basis Spreads 利率基点息差的ABCD
ERN: Swaps & Forwards (Topic) Pub Date : 2015-11-30 DOI: 10.2139/ssrn.2696743
Ferdinando Ametrano, L. Ballabio, Paolo Mazzocchi
{"title":"The ABCD of Interest Rate Basis Spreads","authors":"Ferdinando Ametrano, L. Ballabio, Paolo Mazzocchi","doi":"10.2139/ssrn.2696743","DOIUrl":"https://doi.org/10.2139/ssrn.2696743","url":null,"abstract":"We show that forward rates can be modeled as ABCD parametric tenor basis spreads over the underlying overnight rate curve. This is possible for both continuously and simply compounded forward rates, with a simple approximation for converting between the corresponding basis. Increasing interest-rate tenor dominance, as empirically observed, is recovered and can be structurally enforced using a robust methodology improvement based on relative basis between the most liquid tenors. The smoothness requirement is moved from forward rate curves to tenor basis curves, properly dealing with the market evidence of jumps in forward rates. In the case of continuously compounded tenor basis, pseudo-discount factors are also available. An implementation of this methodology is available in the QuantLib open-source project.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133547593","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 0
Stabilizing Log-Normal Diffusion in View of Compounding Swaps Funding Risk Credit Valuation Adjustment (FRCVA) 基于复合掉期融资风险信用评估调整的稳定对数正态扩散
ERN: Swaps & Forwards (Topic) Pub Date : 2015-09-01 DOI: 10.2139/ssrn.2684392
Cyril Durand
{"title":"Stabilizing Log-Normal Diffusion in View of Compounding Swaps Funding Risk Credit Valuation Adjustment (FRCVA)","authors":"Cyril Durand","doi":"10.2139/ssrn.2684392","DOIUrl":"https://doi.org/10.2139/ssrn.2684392","url":null,"abstract":"We discuss several methodologies for stabilizing the diffusion of compounding instruments modeled by means of lognormal instantaneous interest rate models. We first delve into alternative mathematical and numerical methodologies before showing that the latter suffer from a high seed sensitivity which makes them difficult to apply in practice. We consequently resort to a fine-tune capping of the maximal value of the interest rate which ensures stabilization without altering the main diffusion moments characteristics. We illustrate our approach by examining the funding loss, the Funding Risk Adjustment (FRA) and the Funding Risk Credit Valuation Adjustment (FRCVA) of a compounding swap along the lines of a preceding paper where we advocate the benefit, when funding cannot be hedged, of examining funding risk in an actuarial setting.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"58 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117170131","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 0
The Influence of Systemic Importance Indicators on Banks’ Credit Default Swap Spreads 系统重要性指标对银行信用违约互换价差的影响
ERN: Swaps & Forwards (Topic) Pub Date : 2015-05-13 DOI: 10.2139/ssrn.2648466
Jill Cetina, Bert Loudis
{"title":"The Influence of Systemic Importance Indicators on Banks’ Credit Default Swap Spreads","authors":"Jill Cetina, Bert Loudis","doi":"10.2139/ssrn.2648466","DOIUrl":"https://doi.org/10.2139/ssrn.2648466","url":null,"abstract":"This paper examines the relationship between banks’ observed credit default swap (CDS) spreads and possible measures of systemic importance. We use five-year CDS spreads from Markit with an international sample of 71 banks to investigate whether market participants are giving them a discount on borrowing costs based on the expectation that governments would consider them “too big to fail.” We find a consistent, statistically significant negative relationship between five-year CDS spreads and nine different systemic importance indicators using a generalized least squares (GLS) model. The paper finds that banks perceived as too big to fail have CDS spreads 44 to 80 basis points lower than other banks, depending on the asset-size threshold and controls used. Additionally, the study suggests market participants pay more attention to asset size than to a more complex measure, such as designation as a globally systemically important bank (G-SIB), that includes additional factors, such as substitutability and interconnectedness. Lastly, the model suggests that asset size acts as a threshold effect, rather than a continuous effect with the best fitting models using asset-size thresholds of $50 billion to $150 billion.","PeriodicalId":378972,"journal":{"name":"ERN: Swaps & Forwards (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-05-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124358786","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
引用次数: 7
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