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This paper empirically shows that the long-term persistence of negative swap spreads, which was unique phenomenon only in Korean interest rate swap market, could be caused by the covered interest rate arbitrage trading by foreign investors in Korean market. It concretely shows the fixed rates of currency swap, whose decreases expand the incentive for arbitrage trading by foreign investors, to positively influence the interest rate swap spreads. The empirical results suggests that the foreign factors might make more effect on the interest rate swap market than the spot bond market, resulting in the negative interest rate swap spreads. The results implies that, the asset pricing for interest rate swap needs to consider the foreign factors under the circumstances of open capital market.

This study investigates the influence of theoretical determinants on the Korea sovereign CDS spreads from January 2007 to September 2009 based on structural credit risk model. For the analysis of determinants on the sovereign CDS spread, this study adopts interest swap rate as reference interest rate, and decomposes yields curve into two components, ie, interest level and slope. Considering multivariate regression in level and difference variables, Stock returns and Interest rates have a significant effect on the CDS spreads among the theoretical determinants of structural credit risk models. CDS spreads may behave quite differently during volatile regime compared with their behavior in tranquil regime. We therefore apply Markov switching model to investigate the possibility that the influence of theoretical determinants of CDS spread has a regime dependent behavior. In all regimes Korean sovereign CDS spreads are highly sensitive to stock market returns, whereas in tranquil regime interest rates also have influence on CDS spreads. We conclude that for the efficient hedging of CDS exposure trader should adjust equity hedge ratio to the relevant regime.

This paper tries to empirically investigate whether macroeconomic risk may be statistically useful in explaining long-term volatility of interest rate swap (IRS) in korean market. This paper uses the component-jump model to estimate long-term volatility of IRS from 1/2/2003 to 1/31/2013.

By using the component-jump model, the IRS volatility is decomposed into a long-term and a short-term component. According to this study, slope of yield curve and foreign exchange volatility as a proxy of macroeconomic risk have been significant in explaining long-term volatility of IRS.

The credit ratings issued by the Big 3 ratings agencies are inaccurate and slow to respond to market changes. This paper aims to develop a rigorous, transparent and robust credit assessment and rating scheme for sovereigns.

This paper develops a regression-based model using credit default swap (CDS) data, and data on financial and macroeconomic variables to estimate sovereign CDS spreads. Using these spreads, the default probabilities of sovereigns can be estimated. The new ratings scheme is then used in conjunction with these default probabilities to assign credit ratings to sovereigns.

The developed model accurately estimates CDS spreads (based on RMSE values). Credit ratings issued retrospectively using the new scheme reflect reality better.

This paper reveals that both macroeconomic and financial factors affect both systemic and idiosyncratic risks for sovereigns.

The developed credit assessment and ratings scheme can be used to evaluate the creditworthiness of sovereigns and subsequently assign robust credit ratings.

The transparency and rigor of the new scheme will result in better and trustworthy indications of a sovereign’s financial health. Investors and monetary authorities can make better informed decisions. The episodes that occurred during the debt crisis could be avoided.

This paper uses both financial and macroeconomic data to estimate CDS spreads and demonstrates that both financial and macroeconomic factors affect sovereign systemic and idiosyncratic risk. The proposed credit assessment and ratings schemes could supplement or potentially replace the credit ratings issued by the Big 3 ratings agencies.

Credit default swaps (CDSs) are among the most widely used credit derivatives since their innovation and designed to hedge the credit risk of reference entities. They were exposed after the global financial crisis of 2007–08, and were blamed for its occurrence. This paper aims to describe the fundamental mechanism of CDSs, demonstrating how a CDSs contract works. Further, this study explores the growth of the global and Indian CDS market by taking a holistic perspective.

An objective-driven descriptive research design is adopted to achieve a rigorous and accurate analysis of the study. Therefore, research papers from high-impact journals have been carefully reviewed to achieve the aim of the study.

The study shows that CDSs are still in their infancy in India. Banks are the primary market makers and users in the Indian CDSs market; therefore, regulatory authorities must assist them to boost the market. For banks to become more confident, they should gain experience and knowledge from other active CDSs markets around the world.

This study attempts to provide insights into the current state of the global as well as the Indian CDS market. Further, this study suggests approaches for the Indian banking sector to play an active role in the Indian CDSs market.