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Analysing the deviation of CDS from its reference bond spread and its potential relationship with anticipating systemic risk

Gallagher, Niall (2019) Analysing the deviation of CDS from its reference bond spread and its potential relationship with anticipating systemic risk. Masters thesis, Dublin, National College of Ireland.

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In 1994, J.P. Morgan alongside Deutsche bank developed the Credit Default Swap (CDS), an innovation of its time but a product that has only created consistent controversy ever since. Although there is nothing ground breaking about the product itself, as it is a version of an insurance contract designed to offload credit risk to a third party. Much of the blame for the financial crisis has been attributed to its role. This was due mainly to financial institutions leveraging up their books and using CDS as a get out of jail card so that they couldn’t be held responsible in the case of default. Since the turn of the century, there has been a huge growth in the research of credit derivatives and the correlated relationship between CDS and bond spreads specifically known CDS-Bond basis. In this paper we propose an analysis of the deviation of CDS from their respective bond spreads and its potential relationship in predicting systemic risk. The author proposes that using two time-frames, one defined as economically sound and the other with high levels of volatility will be able to determine the answer to this analysis. The first aspect of the paper will be reviewing the current literature that exists in the scope CDS, CDS and bond spreads and its association with systemic risk and the models used to determine this. The statistical tests, the data used and the methodology it is based upon are then outlined. Finally, the analysis is presented through a discussion where the results of the two-time frames are compared and critically evaluated where we come to the conclusion that yes there is a statistical significance to suggest that the deviation of a CDS from the associated bond spread could potentially be used a metric in predicting systemic risk.

Item Type: Thesis (Masters)
Subjects: H Social Sciences > HG Finance
H Social Sciences > HG Finance > Investment
H Social Sciences > HG Finance > Investment > Investment Companies. Investment Trusts. Mutual Funds.
Divisions: School of Business > Master of Science in Finance
Depositing User: Caoimhe Ní Mhaicín
Date Deposited: 21 Oct 2019 10:57
Last Modified: 21 Oct 2019 10:57

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