Torsten Asmus
As the periodic debt ceiling game of chicken proceeds, you might read about the credit default swap (CDS) rate on US government debt. This is commonly (even by economists) used to quantify the market’s estimate of probability
Reading The U.S. Government CDS Tea Leaves
Summary
- The credit default swap (CDS) rate on US government debt is commonly used (even by economists) to quantify the market’s estimate of probability that the US government will default.
- Although it is related to this probability, it is not a direct measure of the "true" probability.
- The risk premium embedded in Treasury CDS is likely to be quite large given that this type of CDS will pay off in bad economic times.
Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University. Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues. He holds a Ph.D. in business economics from the University of Chicago.