Overpricing in Emerging Market Credit-Default-Swap Contracts: Some Evidence from Recent Distress Cases
IMF Working Papers, June 1, 2005
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- Overpricing in Emerging Market Credit-Default-Swap Contracts: Some Evidence from Recent Distress Cases
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Bibliographic details
- Authors: Jochen R. Andritzky, Manmohan Singh
- Published: June 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861440.001
Summary
- Recent debt restructurings that constitute credit events have been more frequent than outright defaults.
- Sovereign bond prices may not collapse during distress when restructurings are more common.
- High recovery values after restructuring imply that the cost of credit-default-swap (CDS) contracts to the buyer (as measured by CDS spreads) may be higher than warranted.
- The study estimates the extent of such overpricing by using the cheapest-to-deliver (CTD) bond as a proxy for the recovery-value assumption.
Research scope and metadata
- Authors: Jochen R. Andritzky, Manmohan Singh
- Publication date: June 1, 2005
- Series: Working Paper No. 2005/125
- Issue: 125
- Volume: 2005
- Pages: 13
- DOI: https://doi.org/10.5089/9781451861440.001
- ISBN: 9781451861440
- ISSN: 1018-5941
- Stock No: WPIEA2005125
- Subjects: Bonds, Credit, Credit default swap, Currencies, Emerging and frontier financial markets
- Keywords: bond, CDS, CDS contract, price, value, WP
Methodology and proxy
- Use of the cheapest-to-deliver (CTD) bond as a proxy for the recovery-value assumption in CDS contracts.
- Estimation of overpricing in CDS spreads relative to implied recoveries based on CTD bond values.
Key findings and implications
- When restructurings (credit events) are more frequent than outright defaults, recovery values implied by market prices remain relatively high.
- CDS spreads that price in lower recoveries may overstate the cost of protection to buyers relative to expected post-restructuring recoveries.
- The CTD-based proxy provides a mechanism to quantify the extent of potential overpricing in emerging market CDS contracts.
Access and dissemination
- Publication type: IMF Working Papers
- Formats: PDF (Download PDF indicated), More Formats on IMF eLibrary
- Related portal: Visit the IMF eLibrary (over 25,000 IMF publications in multiple formats)
IMF Working Paper: Overpricing in Emerging Market Credit-Default-Swap Contracts: Some Evidence from Recent Distress Cases, Jochen R. Andritzky and Manmohan Singh, Working Paper No. 2005/125, June 1, 2005.