Credit derivatives as a commitment device : evidence from the cost of corporate debt

When a firm writes incomplete debt contracts, its limited ability to commit to not strategically default and renegotiate its debt requires the firm to pay higher yields to its creditors. Hedged by credit derivatives, creditors have stronger bargaining power in the case of debt renegotiation, which ex-ante demotivates the firm to default strategically. In this paper, I aim to investigate theoretically and empirically whether credit derivatives could help reduce the cost of debt contracting stemming from the possibility of strategic default. I find that firms with a priori high strategic default incentives experience a relatively large reduction in their corporate bond spreads after the introduction of credit default swaps (CDS) written on their debt. This result is robust to controlling for the endogeneity of CDS introduction. My finding is consistent with the presence of CDS reducing the strategic default-related cost of corporate debt, suggesting the beneficial role of credit derivatives as a commitment device for the borrower to repay the lender

The economic impact of credit default swap on credit markets

This study conducts a comprehensive analysis of the economic benefits and costs of credit default swap (CDS) in credit markets since its inception. Consistent with its role of insuring credit risk, the introduction of CDS reduces illiquidity and liquidity risk more for speculative grade bonds with high credit risk than investment grade ones. More importantly, CDS significantly improves the price convergence between investment grade bonds and CDS spreads through a popular trading strategy—CDS-bond basis arbitrage in normal period. In the recent crisis, however, CDS fails to reduce the prolonged price divergence between the two markets plausibly due to the lack of arbitrage. Overall, the economic impact of CDS is dependent on the prevailing trading strategies in the credit markets

The structure of gauge-invariant ideals of labelled graph C∗C^*-algebras

In this paper, we consider the gauge-invariant ideal structure of a $C^*$-algebra $C^*(E,\mathcal{L},\mathcal{B})$ associated to a set-finite, receiver set-finite and weakly left-resolving labelled space $(E,\mathcal{L},\mathcal{B})$, where $\mathcal{L}$ is a labelling map assigning an alphabet to each edge of the directed graph $E$ with no sinks. Under the assumption that an accommodating set $\mathcal{B}$ is closed under taking relative complement, it is obtained that there is a one to one correspondence between the set of all hereditary saturated subsets of $\mathcal{B}$ and the gauge-invariant ideals of $C^*(E,\mathcal{L},\mathcal{B})$. For this, we introduce a quotient labelled space $(E,\mathcal{L},[\mathcal{B}]_R)$ arising from an equivalence relation $\sim_R$ on $\mathcal{B}$ and show the existence of the $C^*$-algebra $C^*(E,\mathcal{L},[\mathcal{B}]_R)$ generated by a universal representation of $(E,\mathcal{L},[\mathcal{B}]_R)$. Also the gauge-invariant uniqueness theorem for $C^*(E,\mathcal{L},[\mathcal{B}]_R)$ is obtained. For simple labelled graph $C^*$-algebras $C^*(E,\mathcal{L},\bar{\mathcal{E}})$, where $\bar{\mathcal{E}}$ is the smallest accommodating set containing all the generalized vertices, it is observed that if for each vertex $v$ of $E$, a generalized vertex $[v]_l$ is finite for some $l$, then $C^*(E,\mathcal{L},\bar{\mathcal{E}})$ is simple if and only if $(E,\mathcal{L},\bar{\mathcal{E}})$ is strongly cofinal and disagreeable. This is done by examining the merged labelled graph $(F,\mathcal{L}_F)$ of $(E,\mathcal{L})$ and the common properties that $C^*(E,\mathcal{L},\bar{\mathcal{E}})$ and $C^*(F,\mathcal{L},\bar{\mathcal{F}})$ share

The Impact of Credit Default Swaps on Corporations and Financial Markets.

Credit Default Swap (CDS) is one of the most salient financial innovations and the utility of CDS markets to our economy is still subject to a heated debate. This dissertation examines the economic impact of CDS on corporations (first chapter) and financial markets (second chapter). In the first chapter, I provide the evidence of CDS playing new economic roles as a commitment device for the borrower (i.e. the firm) to repay their debt to lenders (i.e. creditors). When the firm writes incomplete debt contracts, its limited ability to commit not to default strategically in the future incurs the cost of contracting that will be ultimately paid by the firm. CDS can reduce this cost ex ante by strengthening creditors’ bargaining power in debt renegotiation. I identify, both theoretically and empirically, the benefit of CDS reducing the contracting cost arising from the possibility of the firm’s strategic default. I show that firms a priori most likely to face the limited commitment problem (i.e. firms with high strategic default incentives) experience a relatively larger reduction in their corporate bond spreads following the introduction of CDS. In the second chapter, coauthored with Haitao Li and Weina Zhang, we provide a comprehensive empirical analysis on the implication of CDS-Bond basis arbitrage for the pricing of corporate bonds. Basis arbitrageurs introduce new risks such as funding liquidity and counter-party risk into the corporate bond market, which was dominated by passive investors before the existence of CDS. We show that a basis factor, constructed as the return differential between LOW and HIGH quintile basis portfolios, is a superior empirical proxy that captures the new risks. In the cross-section of investment grade bond returns, the basis factor carries an annual risk premium of about 3% in normal periods. However, speculative grade bonds are not affected by the basis factor as they are not widely used in the basis arbitrage.PHDBusiness AdministrationUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/93963/1/gihkim_1.pd

CDS-bond basis and bond return predictability

We examine the predictive power of the CDS-bond basis for future corporate bond returns. We find that residual basis, the part of the CDS-bond basis that cannot be explained by a wide range of market frictions such as counterparty risk, funding risk, and liquidity risk, strongly negatively predicts excess returns. Controlling for systematic risk factors, including credit risk and liquidity risk, we find that a bond portfolio formed on the residual basis generates a significant abnormal bond return of 1.79% at the 20-day horizon. The abnormal returns due to the residual basis reflect mispricing rather than missing systematic risk factors. These results are robust to different horizons and sample periods and to the various characteristics of bonds. Overall, our results imply a beneficial role of CDS in the bond market as the existence of mispricing between CDS and bonds results in a subsequent price convergence in bonds

Shantytown formation as an anti-systemic historical process : a world-system study on Peruvian social transformation

Shantytown formation in Peru has widely been understood as a simple informal housing formation by the urban poor in Peru. Most studies have tried to determine the cause of shantytown formation and concluded that it is caused by extreme rural poverty and expanding inequalities between the rural and urban areas resulting in the migration of the impoverished to the cities. Yet, they did not provide more comprehensive and historical analysis in terms of how such social process begun and evolved. The purpose of this research is to offer a comprehensive interpretation by identifying a long-durée historical trajectory that led shantytown formation in Lima. By tracing back to the time when Lima was established as the capital city of Peru in 1532, this research situates this process in the longer and larger context of Peruvian social transformation beyond the twentieth century and the Peruvian society. Using the method of historical sociology, this study pays attention to crucial historical events and transformation by proposing five different time periods starting from 1532 to the present. This study found out that there are the underlying historical processes and structures of the capitalist world-system which led to the shantytown formation in Lima, and it is possible to interpret that shantytown formation is a part of a long-durée anti-systemic process against the exploitive capitalist world-system. Moreover, the shantytowns have served crucial social functions in contemporary Peru and the inhabitants have become crucial agents of social change by providing a new path for Peruvian social transformation

The CDS-bond basis arbitrage and the cross section of corporate bond returns

We provide a comprehensive empirical analysis on the implication of CDS-Bond basis arbitrage for the pricing of corporate bonds. Basis arbitrageurs introduce new risks such as funding liquidity and counterparty risk into the corporate bond market, which was dominated by passive investors before the existence of credit default swap (CDS). We show that a basis factor, constructed as the return differential between LOW and HIGH quintile basis portfolios, is a superior empirical proxy that captures the new risks. In the cross section of investment grade bond returns, the basis factor carries an annual risk premium of about 3% in normal periods

catena-Poly[[bis­(2,4-dichloro­benzoato)bis­(methanol-κO)cobalt(II)]-μ-4,4′-bipyridine-κ2 N:N′]

In the title compound, [Co(C7H3Cl2O2)2(C10H8N2)(CH3OH)2]n, the CoII ion lies on a twofold rotation axis and is in a slightly distorted octa­hedral CdO4N2 environment, formed by two O atoms from monodentate dichloro­benzoate ligands, two O atoms from methanol ligands, and two N atoms from trans-related 4,4′-bipyridine ligands. The bipyridine ligands also lies on a twofold rotation axis and bridge the CoII ions, forming chains extending along [010]. An intra­chain O—H⋯O hydrogen bond is observed