Single-Name Credit Default Swaps : A Review of the Empirical Academic Literature

Total notional principal outstanding for single-name credit default swaps (CDSs) based on corporate and sovereign reference entities grew significantly through June 2011, but, following the global credit crisis and Eurozone sovereign debt crisis, notional amounts on single-name CDSs outstanding contracted have sharply since then. The recent retrenchment of the single-name CDS market has prompted some commentators to question the legitimacy and viability of single-name CDSs and their impact on financial markets and institutions. We reviewed more than 260 empirical studies (including published articles and circulated working papers) to shed light on single-name CDSs along four dimensions: the informational content and determinants of single-name CDS spreads; the impact of single-name CDS trading on the availability and cost of credit to reference entity borrowers, and the impact of single-name CDS availability on the incentives and actions of lenders; the relations between single-name CDSs and related debt and equity markets; and the impact and informational content of single-name CDSs on interconnectedness across financial intermediaries and systemic risk. In addition to our comprehensive review of the empirical evidence regarding these four issues, we also provide a detailed discussion of the mechanics and documentation of single-name CDS transactions