An Empirical Study of Credit Default Swaps

Abstract

This is an examination of the pricing of credit default swaps that traded around the dates of the Asian currency crisis using two different credit risk models. The cost of default insurance is generally found to be lower than the expected value of payments in the event of default. According to both models, the cost of default insurance is greater than the expected value of payments for credit default swaps written on entities domiciled in countries subject to the Asian currency crisis, a finding attributable to moral hazard.