An empirical analysis of credit default swaps

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This article represents the first empirical examination of credit default swaps. We appeal to corporate and option pricing theory to argue that credit default swaps are actually put options. We suggest a linear regression model containing five variables that are important for pricing standard options. This empirical model shows that at least three, possibly four of these same variables are also important in pricing credit default swaps. Interestingly, we find that swap participants appear to manipulate the variables under their control to structure the amount of credit risk that is traded. Finally, we find that the credit default swap prices reflect the recent Asian currency crisis.