Credit risk is one of the most important risks faced by lenders and can affect not only their financial health but also economic growth and financial stability. It is therefore crucial to assess the potential losses from credit risk as conservatively as possible and to manage it effectively. A systematic review of the academic literature was conducted to answer these questions. The results of the review showed that models that examine the relationship between sustainability and credit risk most commonly use the environmental factor as an indicator of sustainability (72% of the studies analysed). The Altman Z-score was the most used credit risk estimator in the reviewed studies. The second most popular estimate was bond and credit default swap spreads. In summary, the studies reviewed show that lending to more sustainable companies improves: The quality of the loan portfolio and reduces credit risk, leading to better credit ratings, and lower borrowing costs for the lenders themselves; lenders’ reputation, which makes it possible to attract a larger number of depositors and investors. However, the lender should consider not only the sustainability of the borrower but also the sustainability of the loan collateral, which is seen as a credit risk mitigant.

This paper develops a continuous-time filtering framework for estimating a hazard rate subject to an unobservable change-point. This framework naturally arises in both financial and insurance applications, where the default intensity of a firm or the mortality rate of an individual may experience a sudden jump at an unobservable time, representing, for instance, a shift in the firm’s risk profile or a deterioration in an individual’s health status. By employing a progressive enlargement of filtration, we integrate noisy observations of the hazard rate with default-related information. We characterise the filter, i.e. the conditional probability of the change-point given the information flow, as the unique strong solution to a stochastic differential equation driven by the innovation process enriched with the discontinuous component. A sensitivity analysis and a comparison of the filter’s behaviour under various information structures are provided. Our framework further allows for the derivation of an explicit formula for the survival probability conditional on partial information. This result applies to the pricing of credit-sensitive financial instruments such as defaultable bonds, credit default swaps, and life insurance contracts. Finally, a numerical analysis illustrates how partial information leads to delayed adjustments in the estimation of the hazard rate and consequently to mispricing of credit-sensitive instruments when compared to a full-information setting.

Purpose This study aims to explore how foreign divestment (FD) affects the insolvency risk of parent firms and examines the moderating role of corporate social responsibility (CSR) in this relationship, an underexplored but critical issue in international business. It focuses on how resource losses from divestment destabilize parent firm solvency, offering insights into the financial vulnerabilities of multinational enterprises (MNEs). Design/methodology/approach Grounded in the resource-based view (RBV) and foreign divestment literature, this study analyzes a longitudinal dataset of 119 publicly listed Nordic MNEs (Finland, Sweden, Norway and Denmark), spanning 667 firm-year observations over 1992–2019. Insolvency risk is measured using Merton’s distance to default (DD) and credit default swap (CDS) spreads, with data from the Credit Research Initiative (CRI), Orbis and Refinitiv Eikon. For the CSR moderation analysis, a sub-sample from 2003 onward is used. Findings Foreign divestment is positively associated with higher insolvency risk, reflecting the financial strain from strategic asset loss or reallocation. Moreover, parent firms with stronger CSR engagement face greater insolvency risk during divestments. Originality/value Integrating RBV and CSR perspectives, this study provides a nuanced view of the financial and strategic consequences of foreign divestment. It offers actionable insights for MNEs managing divestments in volatile markets and underscores CSR’s complex role in mitigating or amplifying financial distress.

The difference between the credit spread associated with a bond and the par spread associated with selling credit default swap (CDS) protection on the bond issuer is known as the bond’s negative basis. It is an important quantity for credit investors in order to decide whether it is more lucrative to buy a bond or to sell CDS protection. This definition, however, constitutes an inaccurate measurement devoid of a rigorous backing by classical arbitrage pricing theory, since it implicitly ignores the possibility of a credit event and also does not accurately take into account potential differences regarding the cash requirements of bond and CDS. We provide an accurate definition for the negative basis, generalizing an idea originated in [J.-F. Mai (2019) Pricing-hedging duality for credit default swaps and the negative basis arbitrage, International Journal of Theoretical and Applied Finance 22 (6), 1950032]. While the latter reference still hinges on a no arbitrage assumption in an implicit market model that is not always satisfied, we adopt a logic that is valid without restrictive assumptions but universally valid in practice. Our definition is shown to be identical in the case when the implicit no arbitrage assumption in [J.-F. Mai (2019) Pricing-hedging duality for credit default swaps and the negative basis arbitrage, International Journal of Theoretical and Applied Finance 22 (6), 1950032] happens to hold. We thereby complete a sound theoretical framework that clarifies and justifies how the negative basis must be defined. Furthermore, our framework is general enough to deal with discrete and floating rate bond coupons, and also adapts to the situation when bond and CDS have different currency denomination, so that all cases of practical relevance are included.

ABSTRACT We consider an equity market subject to risk from both unhedgeable shocks and default. To partially offset default risk, investors may also dynamically trade in a rolling credit default swap (CDS) market. Assuming investment opportunities are driven by functions of an underlying diffusive factor process, we identify the certainty equivalent for a constant absolute risk aversion inve stor with a semi‐linear partial differential equation (PDE) that has quadratic growth in both the function and gradient coefficients. For general model specifications, we prove the existence of a solution to the PDE, which is also the certainty equivalent. We show the optimal policy in the CDS market covers not only equity losses upon default (as one would expect), but also losses due to restricted future trading opportunities. We use our results to price default‐dependent claims through the principle of utility indifference, and we show that provided the underlying equity market is complete absent the possibility of default, the equity‐CDS market is complete accounting for default. Lastly, through a numerical application, we show the optimal CDS policies are essentially static (and hence easily implementable) and that investing in CDS dramatically increases investors' indirect utility.

This study takes the Syrian civil war as a case, selecting key conflict events such as the Battle of Aleppo (2012), the chemical weapons crisis (2013), and the Russian military intervention (2015). By using event study methods and volatility comparison analysis, it systematically examines the immediate impacts of these events on the financial markets of major Middle Eastern countries and their regional spillover effects. Based on UCDP conflict data and daily stock indices, exchange rates, and credit default swap (CDS) spreads of Syria, Turkey, and Israel, this study constructs a "source-receiving end" shock transmission model. Under the control of global macroeconomic factors, it deeply analyzes the transmission mechanism of cross-border diffusion of geopolitical risks. The results indicate that key conflict events significantly increased Syrian financial market volatility, with stock indices declining, exchange rates depreciating, and CDS spreads widening, thereby confirming H1. The shocks were rapidly transmitted to neighboring countries, with the Turkish market responding most sensitively, while the Israeli market showed a slightly delayed reaction but still exhibited significant abnormal volatility. Spillover intensity decreased with geographic distance, supporting H2. Exchange rates and CDS were more sensitive to short-term uncertainty shocks, reflecting the critical role of capital flows and risk premiums. The study emphasizes the importance of establishing regional financial monitoring collaboration mechanisms, improving exchange rate and capital flow early-warning systems, and implementing contingency-based regulation for key events, providing empirical guidance for understanding the transmission of geopolitical risks in the Middle East, investor risk management, and policy-making.

Abstract We investigate how a correct decomposition of the credit default swap (CDS) quote into redenomination and default risks allows us to explore effectively the dynamic interconnections between such noteworthy events in four countries in the Euro area. We employ daily CDS data denominated in different currencies and default clauses from November 2015 to September 2023. We make original use of the TVP-VAR frequency connectedness approach, which can provide us with more accurate information about the direction and scale of propagation of foreign redenomination risk shocks on default premia during recent crisis periods and within short- and long-run frequencies. Our main result is that connectedness is significant although, quantitatively, time-dependent and intensified during extreme events, revealing the vital role of systemic risk factors that drive the euro area sovereign bond markets. Overall, we show that the net connectedness is from denomination risk to default risk for most of the cases of the entire sample. Furthermore, we observe that redenomination shocks in a particular country led to a rise in the default risk of other countries within the Euro area. Splitting the connectedness indices into high- and low-frequency components indicates that default risk is often identified as the net transmitter of redenomination risk for connectedness in the short term. Furthermore, the long-term pattern of propagation highlights that most of the transmitted shocks originated from redenomination risk. Policymakers and investors should employ adaptable regulatory and investment strategies because of the interchangeable nature of redenomination and default risks, especially changes in frequency spillovers.

We investigate the impact of Environmental, Social, and Governance (ESG) rating changes and daily ESG news sentiment on firm credit risk. We document a significant increase in credit default swap (CDS) spreads following ESG rating downgrades, especially for the social pillar, while we find a muted reaction to ESG upgrades. A similar asymmetrical effect is documented for ESG news. We further show that the adverse effect of ESG downgrades on the CDS market is stronger for firms with lower creditworthiness, but mitigated in the presence of positive ESG sentiment, a transparent information environment, and higher rating disagreement.

Assessing the Value of Implicit Government Guarantees in State-Owned Enterprise Bonds: Insights from Credit Default Swaps

In this study, the causal relationships between the Borsa Istanbul 100 (BIST100) index and two key risk indicators—Credit Default Swap (CDS) premiums and the VIX index—were analyzed using monthly data for the period from October 2008 to December 2024. Within the scope of time series analysis, the stationarity levels of the series were first evaluated using the Augmented Dickey–Fuller (ADF) and Phillips–Perron (PP) unit root tests. Since the variables were found to be integrated of order one I(1) and stationary at their first differences, the Granger causality test was applied. The findings reveal that the Turkish stock market is significantly and unidirectionally influenced by the VIX index, which reflects global risk sentiment, while CDS premiums are influenced by the BIST100 index. This indicates that, in emerging economies such as Türkiye, stock markets are in dynamic interaction with both internal and external risk indicators, offering important implications for investor behavior and policymaking.

This research focuses on the 5-Years Credit Default Swaps (CDS) of J.P. Morgan, as a crucial product for risk transformation and financial system monitoring purposes. The 5-Year CDS contract is the benchmark for measuring corporate default risk, utilized throughout the world by investors, regulators and academics. The paper opens with an armchair guide to the CDS market, and makes the case that J.P. Morgan is an especially good poster-child for it. Next, this paper present the firm’s financial status and past behaviour of its CDS spreads, emphasizing episodes like the 2008 crisis, COVID-19 outbreak, and the 2023 U.S. banking collapse. A hedging strategy is presented for institutional investors that own J.P. Morgan bonds, and by which CDS contracts reduce the amount of risk in a portfolio. The paper goes on to address more general market and regulatory implications of CDS trading such as risk reduction, systemic impacts, and constraints (e.g., basis risk and market liquidity). The results show that J.P. Morgan’s 5-Year CDS plays its roles of hedging and risk monitoring only imperfectly on account of market imperfection constraints. The final section of the paper discusses potential directions for further research, such as index CDS, multi-factor risk models, and the role of artificial intelligence in credit risk forecasting.

This paper examines the use of Credit Default Swaps (CDS) for hedging credit risk, with a specific focus on the practices of a major dealer bank, JPMorgan Chase & Co. While CDS spreads are recognized as a relatively pure measure of default risk and often lead bond markets in price discovery, corporate bond spreads additionally embed significant liquidity, funding, and tax components. This divergence means a CDS-only hedge is insufficient to neutralize P&L volatility in cash bond inventories. We propose an integrated hedging framework: using CDS as a primary overlay for default risk and an early-warning indicator, then combining them with cash-bond or asset-swap legs to manage the resultant basis and liquidity risks. This approach must be dynamic, especially under market stress when funding shocks and margin calls can widen basis spreads. The strategy is underpinned by a strong balance sheet, which allows for maintaining hedges during dislocations. The study concludes that effective credit risk management requires a dual approach that addresses both default and non-default components of credit spreads, with implications for bank-level risk management, market efficiency, and financial stability policy.

ABSTRACT This study investigates sovereign credit risk connectedness across countries from a multilayer network perspective. Using a dataset of sovereign credit default swap (SCDS) spreads for European Union (EU) members and Belt and Road (B&R) countries, we construct multilayer SCDS networks that capture sovereign credit risk connectedness in terms of linear, nonlinear, and tail correlations. We analyse multilayer SCDS network structures by employing community structure, average distance, and node strength and explore the determinants of sovereign credit risk connectedness. The empirical results are as follows: First, community structures of multilayer SCDS networks are significantly correlated with geographical and economic factors. Second, average distances for B&R countries are lower than those for EU members. Average distances decrease rapidly prior to and during systemic turbulence, and increase afterwards. Third, China ranks among the top three influential economies based on its node strength. Lastly, sovereign credit risk connectedness is affected by trade flows, distance, and economic and geographical proximity. It is also affected by capital flows for EU members rather than those for B&R countries.

Purpose The integration of environmental, social and governance (ESG) factors into credit risk assessment has gained prominence among investors and corporations. However, the divergence in ESG ratings across agencies introduces additional uncertainty for corporate credit risk assessment. This study investigates the effect of ESG rating divergence on corporate credit risk, including the mediating role of credit ratings and the moderating role of country ESG performance. Design/methodology/approach Based on a panel dataset of 562 publicly listed firms from 2017 to 2022, the study employs fixed effects regressions to investigate the relationship between ESG rating divergence and credit risk, measured by credit default swap (CDS) spreads and probability of default. Two path analyses assess the mediating role of credit ratings, while interaction terms analyze the moderating effect of country-level ESG performance. Findings The empirical results indicate that ESG rating divergence increases corporate credit risk, particularly pronounced in the environmental pillar. Credit ratings only partially mediate this relationship, suggesting that ESG divergence exerts a direct effect on credit risk. Moreover, higher country ESG performance mitigates the impact of ESG divergence. Originality/value This is the first study to examine whether credit markets price ESG rating disagreement across developed and emerging regions using credit default swap spreads as a forward-looking, market-based measure of credit risk. It further advances the literature by testing credit ratings as a mediating channel and by assessing whether country-level ESG performance moderates the relationship between ESG rating divergence and corporate credit risk.

A study of the impact of the relationship between fiscal space and credit default swaps on emerging and developing economies

The asymmetric effect of capital flows and credit default swap spreads on the US dollar/Turkish lira exchange rate

How do credit default swap spreads react to languages?

ABSTRACT This study investigates whether environmentally sensitive industries benefit from superior credit risk mitigation through sustainable practices, especially during periods of economic uncertainty. We find that there is no substantial difference in risk mitigation between sensitive and non-sensitive industries under normal economic conditions, as evidenced by U.S.-traded credit default swap (CDS). In comparison to their non-sensitive counterparts, firms in environmentally sensitive industries with stronger ESG practices experience a greater reduction in credit risk under conditions of high economic policy uncertainty (EPU). This relationship is also significant for the individual environmental and governance pillar scores. Analysis across the term structure reveals that higher ESG performance of firms in sensitive industries leads to improved risk reduction for medium- and long-term maturity bonds. However, this phenomenon is almost negligible for short-term bonds. Hence, the importance of incorporating the term structure of interest when assessing the impact of ESG practices on CDS is evident in both environmentally sensitive and non-sensitive industries.

Purpose This study examines the role of credit risk mitigation warrants (CRMWs) in reducing default risk in China's private bond market during rising default rates and tightening credit since 2018, particularly for financially distressed enterprises. Design/methodology/approach Focusing on credit bonds issued by private enterprises in China from 2019 to 2022, this study uses a fixed-effects panel model to test the relationship between CRMW initiation and bond default probability. Propensity score matching and placebo tests were used to verify the robustness of the findings. The role of CRMWs in reducing the default risk of firms with weak debt repayment capacity is also examined. Findings The results indicate that CRMW initiation significantly reduces bond default probability, particularly for firms facing financial distress or with weak debt repayment capacity. This aligns with the intended purpose of CRMWs: to support private enterprises that are temporarily facing difficulties but have strong market prospects. The findings remain robust after additional tests. Originality/value This study makes two main contributions: (1) it provides evidence of the real impact of CRMWs in China's bond market, offering insights distinct from credit default swap markets in developed economies; and (2) it examines the financial mechanisms through which CRMWs reduce credit risk and provides practical guidance for creditors in managing credit risk through derivatives.

ABSTRACT In this paper, we attempt to introduce peer effects as a new channel in pricing emerging markets credit default swap spreads and study the impact of peer effects on 17 countries for the period 2006–2022. Unlike spillover models, we exploit spatial econometrics to distinguish between direct (country‐specific) and indirect (non‐country‐specific) effects in the credit default swap spreads. We are motivated by the fact that the connectedness among emerging market credit default swaps is proportionally high based on the similarity concerning the dimensions of economic development, governance and uncertainty. Adopting a spatial modelling strategy allows us to consider such similarity to unravel non‐country‐specific channels driving the shifts in sovereign credit risk. On top of documenting significant spatial interactions, we find that indirect effects are roughly as important as the direct ones in explaining the credit default swap spread movements. Our findings are robust to a set of additional analyses and modelling choices. The findings underpin a plethora of attempts on the importance of coordinated policy actions in the international regulatory fora to alleviate sovereign risk. This paper also calls for careful use of credit default swap spreads as a sovereign credit risk indicator. After all, these measures are already a cost indicator but the idiosyncratic risk may be quite different.