Limitations of credit default swaps as predictor of default: BoC paper
Credit default swap (CDS) contracts are difficult to interpret during crises as the implied probability of default is not reflected in all aspects of banks' transactions, a Bank of Canada paper, published in August, says.
Jason Allen, Ali Hortaçsu and Jakub Kastl, the paper's authors, use data from the Canadian financial system during 2007 and 2008 to explore the reliability of using prices of CDS contracts as indicators of default probabilities. The aim of the paper is to analyse risk and
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