Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154032
Authors: 
Vuillemey, Guillaume
Peltonen, Tuomas A.
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper 1599
Abstract: 
This paper presents a stress test model for the CDS market, with a focus on the interplay between banks’ bond and CDS holdings. The model enables the analysis of credit risk transfer mechanisms, includes features of market and liquidity risk, and allows for contagious propagation of counterparty failures. As an illustration, we calibrate the model using sovereign bond and CDS data for 65 major European banks. The model simulation shows that, in case of a sovereign credit event, banks’ losses due to direct and correlated bond exposures are significantly higher than losses due to CDS exposures. The main risk for CDS sellers is found to be sudden increases in collateral requirements on multiple correlated CDS exposures. Close-out netting considerably reduces the extent to which contagion may occur.
Subjects: 
collateral
Contagion
credit default swap
credit event
liquidity risk
market risk
stress test
JEL: 
G21
H63
G15
Document Type: 
Working Paper

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