Review of Derivatives Research

, Volume 18, Issue 3, pp 191–224 | Cite as

Do correlated defaults matter for CDS premia? An empirical analysis

  • Christian Koziol
  • Philipp KoziolEmail author
  • Thomas Schön


Correlated default factors and systemic risk are clearly priced in credit portfolio securities such as CDOs or index CDSs. In this paper we study an extensive CDX data set for evidence of whether correlated default factors are also present in the underlying CDS market. We develop a cash-flow-based top-down approach for modeling CDSs from which we can derive the following major contributions: (1) Correlated default factors did not matter for CDS prices prior to the financial crisis in 2008. During and after the crisis, however, their importance increased strongly. (2) We observe that correlated default factors primarily impact on the CDS prices of firms with an overall low CDS level. (3) Idiosyncratic risk factors for each single CDS play a major (minor) role when the CDS premia are high (low).


Correlated defaults Systemic risk Idiosyncratic risk Collateralized debt obligations Credit default swaps  Credit derivatives 

JEL Classification

G14 G21 


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Copyright information

© European Union 2015

Authors and Affiliations

  • Christian Koziol
    • 1
  • Philipp Koziol
    • 2
    Email author
  • Thomas Schön
    • 1
  1. 1.Department of FinanceUniversity of TübingenTübingenGermany
  2. 2.Deutsche BundesbankFrankfurtGermany

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