Bridge over ocean
1 July 2016 Financial Analysts Journal Volume 72, Issue 4

Interconnectedness in the CDS Market

  1. Mila Getmansky
  2. Giulio Girardi
  3. Craig Lewis

Concentrated risks in the market for credit default swaps (CDSs) are widely considered to have contributed significantly to the 2007–08 financial crisis. We examine the structure of the CDS market using a network-based approach that allows us to capture the interconnectedness between dealers and nondealers of CDS contracts. We find a high degree of interconnectivity among major market participants. Our work helps assess the stability of the CDS market and the potential contagion among market participants. Our findings are of practical importance because even after central clearing becomes mandatory, counterparty risk will remain a relevant systemic consideration owing to the long-term nature of CDS contracts.

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