First Significant Digits and the Credit Derivative Market During the Financial Crisis
The Credit Default Swap (CDS) market has both been lauded for its ability to stabilize the financial system through credit risk transfers and been the source of regulatory concern due to its size and lack of transparency. As a decentralized over-the-counter market, detailed information about pricing...
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VIZJA University
2013-06-01
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| Series: | Contemporary Economics |
| Online Access: | http://ce.vizja.pl/en/download-pdf/id/281 |
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| author | Paul Hofmarcher Kurt Hornik |
| author_facet | Paul Hofmarcher Kurt Hornik |
| author_sort | Paul Hofmarcher |
| collection | DOAJ |
| description | The Credit Default Swap (CDS) market has both been lauded for its ability to stabilize the financial system through credit risk transfers and been the source of regulatory concern due to its size and lack of transparency. As a decentralized over-the-counter market, detailed information about pricing mechanisms is rather scarce. To investigate reported CDS prices (spreads) more closely, we make use of empirical First Significant Digit (FSD) distributions and analyze daily CDS prices for European and US entities during the financial crisis starting in 2007. We find that on a time-aggregated level, the European and US markets obey empirical FSD distributions similar to the theoretical ones. Surprising differences are observed in the development of the FSD distributions between the US and European markets. Whereas the FSD distribution of the US derivative market behaves nearly constantly during the last financial crisis, we find huge fluctuations in the FSD distribution of the European market. One reason for these differences might be the possibility of strategic default for US companies due to Chapter 11 and avoided contagion effects. |
| format | Article |
| id | doaj-art-8e4a1a4b04794a16bf29ccc39235fb21 |
| institution | DOAJ |
| issn | 2084-0845 |
| language | English |
| publishDate | 2013-06-01 |
| publisher | VIZJA University |
| record_format | Article |
| series | Contemporary Economics |
| spelling | doaj-art-8e4a1a4b04794a16bf29ccc39235fb212025-08-20T03:06:50ZengVIZJA UniversityContemporary Economics2084-08452013-06-017219810.5709/ce.1897-9254.80First Significant Digits and the Credit Derivative Market During the Financial CrisisPaul HofmarcherKurt HornikThe Credit Default Swap (CDS) market has both been lauded for its ability to stabilize the financial system through credit risk transfers and been the source of regulatory concern due to its size and lack of transparency. As a decentralized over-the-counter market, detailed information about pricing mechanisms is rather scarce. To investigate reported CDS prices (spreads) more closely, we make use of empirical First Significant Digit (FSD) distributions and analyze daily CDS prices for European and US entities during the financial crisis starting in 2007. We find that on a time-aggregated level, the European and US markets obey empirical FSD distributions similar to the theoretical ones. Surprising differences are observed in the development of the FSD distributions between the US and European markets. Whereas the FSD distribution of the US derivative market behaves nearly constantly during the last financial crisis, we find huge fluctuations in the FSD distribution of the European market. One reason for these differences might be the possibility of strategic default for US companies due to Chapter 11 and avoided contagion effects.http://ce.vizja.pl/en/download-pdf/id/281 |
| spellingShingle | Paul Hofmarcher Kurt Hornik First Significant Digits and the Credit Derivative Market During the Financial Crisis Contemporary Economics |
| title | First Significant Digits and the Credit Derivative Market During the Financial Crisis |
| title_full | First Significant Digits and the Credit Derivative Market During the Financial Crisis |
| title_fullStr | First Significant Digits and the Credit Derivative Market During the Financial Crisis |
| title_full_unstemmed | First Significant Digits and the Credit Derivative Market During the Financial Crisis |
| title_short | First Significant Digits and the Credit Derivative Market During the Financial Crisis |
| title_sort | first significant digits and the credit derivative market during the financial crisis |
| url | http://ce.vizja.pl/en/download-pdf/id/281 |
| work_keys_str_mv | AT paulhofmarcher firstsignificantdigitsandthecreditderivativemarketduringthefinancialcrisis AT kurthornik firstsignificantdigitsandthecreditderivativemarketduringthefinancialcrisis |