BoE paper maps contagion via CDS market
Declining creditworthiness can spill from one bank to another
A team of economists has designed a network model where the creditworthiness of one bank impacts others via the credit default swap (CDS) market. Their results were published in a Bank of England (BoE) staff working paper on January 20.
Michalis Vasios of the BoE, Filip Zikes of the Federal Reserve, and Alan Morrison and Mungo Wilson of Oxford University use their mechanism to study contagion in a banking system.
If bank A has bought protection from bank B against the default of firm X, when B's
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