Using regulatory data on CDS holdings and corporate bond transactions, I provide evidence for a liquidity spillover effect from to markets. Bond trading volumes are 70% larger investors with positions written the debt issuer. Moreover, higher activity substantially improves of underlying bonds, particularly around rating downgrades. Additional analyses reveal that is partly driven by naked posi...

We introduce the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, including default of the investor. We illustrate the symmetry in the valuation and show that the adjustment involves a long position in a put option plus a short position in a call option, both with zero strike and written on the residual net value of the contract...

We present the multi-factor quadratic reduced form model for pricing of credit risky securities. We use quadratic Gaussian processes to model the short term interest rate and the intensity of default showing that we get tractable formulas for the price of credit default swaps and credit default swaptions.

In this paper we show how credit derivatives contracts may be designed to hedge risky credits when banks have to comply with capital requirements and there exists asymmetric information between protection buyers and sellers. In particular we consider the case when banks may of different types according to their ability in screening their borrowers. We show that first-to-default basket swaps in ...

I develop various frameworks for the separation of loss given default and default intensity present in securities with credit risk. They include spot and forward credit default swaps, digital default swaps and bonds. Cross-sectional no-arbitrage restriction between different securities extracts the pure measure of default intensity and loss given default not contaminated by the other. Using spo...

In their paper “Credit Default Swaps from the Viewpoint of Libertarian Property Rights and Contract Theory,” Thorsten Polleit and Jonathan Mariano attempt to show that credit default swaps (CDS) are legitimate and enforceable contracts under Murray Rothbard’s conception of property rights and contract theories. They also try to demonstrate that “CDS are an efficient and effective instrument for...