Contagion effects in the CDS markets

Abstract

This article examines contagion effects of a large idiosyncratic shock in credit default swap market. The credit contagion has been considered as one of the major reasons why the corporate defaults cluster in time. We analyze the structural change in a shock transmission mechanism and test CDS spreads co-move excessively beyond interdependence during the turmoil periods compared to the tranquil periods. We cannot find any evidence that supports the contagion effects in CDS spreads in the investigation into global corporate CDS data. The default probabilities implied in CDS spreads do not show the excessive co-movement after a large shock.