Publications
Publications
- June 2024
- Management Science
Counterparty Risk and Counterparty Choice in the Credit Default Swap Market
By: Wenxin Du, Salil Gadgil, Michael Gordy and Clara Vega
Abstract
We investigate how market participants price and manage counterparty credit risk using confidential trade repository data on single-name credit default swap (CDS) transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts but a large impact on the choice of counterparties. For contracts ineligible for central clearing, we show that market participants are significantly less likely to trade with counterparties whose credit risk is highly correlated with the credit risk of the reference entities and with counterparties whose credit quality is low. For clearable contracts, we find that nondealers are more likely to clear during a crisis and less likely to clear when the reference entity is a large U.S. dealer or a sovereign.
Keywords
Credit Derivatives and Swaps; Market Participation; Risk and Uncertainty; Price; Financial Markets; Credit
Citation
Du, Wenxin, Salil Gadgil, Michael Gordy, and Clara Vega. "Counterparty Risk and Counterparty Choice in the Credit Default Swap Market." Management Science 70, no. 6 (June 2024): 3808–3826.