Assessing Contagion Risks from the CDS Market

46 Pages Posted: 5 Nov 2020

See all articles by Markus Brunnermeier

Markus Brunnermeier

affiliation not provided to SSRN

Laurent Clerc

Banque de France

Yanis El Omari

affiliation not provided to SSRN

Silvia Gabrieli

Banque de France

Steffen Kern

European Securities and Markets Authority

Christoph Memmel

Deutsche Bundesbank

Tuomas Peltonen

European Systemic Risk Board

Natalia Podlich

Deutsche Bundesbank

Martin Scheicher

European Central Bank (ECB)

Guillaume Vuillemey

HEC Paris - Finance Department

Date Written: September, 2013

Abstract

Over the past few years the CDS market’s role has evolved from mostly providing default protection towards credit risk trading. The first-ever credit event in a developed country’s sovereign CDS has further highlighted the importance of the CDS market from a macro-prudential perspective. Developments in the European sovereign CDS market are a part of the major structural shift in euro sovereign debt: in the market’s view, there has been a significant shift from sovereign debt as a (default-free) risk-free benchmark (i.e. bearing interest rate risk only) to sovereign debt as a credit risk asset. Therefore, a significant repricing of the entire asset category has taken place, with major implications ranging from asset allocation to risk management. This implies that some policy issues are not necessarily and exclusively related to the CDS market, but are part of broader developments in the EU financial system. This Occasional Paper aims to provide a comprehensive analysis of the CDS market from a macroprudential perspective. In order to so, a wide range of analytical approaches is applied: Structural analysis of the EU CDS market: description of the market structure, key segments, concentration and evolution over time. Network analysis of bilateral CDS exposures: description of the structure and resilience of the network at an aggregate level as well as of sub-samples. In particular, analysis is conducted on: (i) the aggregated CDS network; (ii) various sub-networks, such as the sovereign CDS network; and (iii) networks for particular CDS reference entities. In order to carry out this analysis, we applied the established literature on interbank and payment systems networks to the CDS exposures network. “Super-spreader” analysis: identification of key “too interconnected to fail” market participants, their activities in the CDS market and their risk-bearing capacity. Scenario analysis of sovereign credit risk: the impact of sovereign credit events on the EU banking system and their potential spillovers. Domino effects in the CDS market: estimation of default chain scenarios for major participants in the CDS market; again, following the literature on interbank networks, we analysed the network impact of the collapse of a major market participant. Comparison of market- and exposure-based assessments of contagion: systemic risk rankings based on market price estimates (e.g. CoVaR) are compared with the rankings obtained using confidential DTCC exposure data in order to understand to what extent market participants are aware of who is a systemically relevant trader in the CDS market and whether these measures of systemic risk are consistent.

Keywords: CDS, contagion, systemic risk, derivatives

JEL Classification: G18, G33, G28

Suggested Citation

Brunnermeier, Markus and Clerc, Laurent and Omari, Yanis El and Gabrieli, Silvia and Kern, Steffen and Memmel, Christoph and Peltonen, Tuomas and Podlich, Natalia and Scheicher, Martin and Vuillemey, Guillaume, Assessing Contagion Risks from the CDS Market (September, 2013). ESRB: Occasional Paper Series No. 2013/04, Available at SSRN: https://ssrn.com/abstract=3723335

Markus Brunnermeier (Contact Author)

affiliation not provided to SSRN

No Address Available

Laurent Clerc

Banque de France ( email )

Paris
France

Yanis El Omari

affiliation not provided to SSRN

No Address Available

Silvia Gabrieli

Banque de France ( email )

Paris
France

Steffen Kern

European Securities and Markets Authority ( email )

103 Rue de Grenelle
Paris, 75007
France

Christoph Memmel

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Tuomas Peltonen

European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Natalia Podlich

Deutsche Bundesbank ( email )

PO Box 10 06 02
D60006 Frankfurt
Germany

Martin Scheicher

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 (Phone)
+49 69 1344 7949 (Fax)

HOME PAGE: http://www.ecb.europa.eu

Guillaume Vuillemey

HEC Paris - Finance Department ( email )

1 rue de la Libération
Paris, Not Applicable 78351
France
+33660204275 (Phone)

HOME PAGE: http://sites.google.com/site/guillaumevuillemey/home

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