01992cas a2200253 a 4500 AALejournalIMF005701 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451872095 1018-5941 BD-DhAAL BD-DhAAL Spackman, Carolyne. The Use (and Abuse) of CDS Spreads During Distress / Carolyne Spackman, Manmohan Singh. Washington, D.C. : International Monetary Fund, 2009. 1 online resource (13 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Credit Default Swap spreads have been used as a leading indicator of distress. Default probabilities can be extracted from CDS spreads, but during distress it is important to take account of the stochastic nature of recovery value. The recent episodes of Landbanski, WAMU and Lehman illustrate that using the industry-standard fixed recovery rate assumption gives default probabilities that are low relative to those extracted from stochastic recovery value as proxied by the cheapest-to-deliver bonds. Financial institutions using fixed rate recovery assumptions could have a false sense of security, and could be faced with outsized losses with potential knock-on effects for other institutions. To ensure effective oversight of financial institutions, and to monitor the stability of the global financial system especially during distress, the stochastic nature of recovery rates needs to be incorporated. Mode of access: Internet Singh, Manmohan. IMF Working Papers; Working Paper ; No. 2009/062 Full text available on IMF http://elibrary.imf.org/view/journals/001/2009/062/001.2009.issue-062-en.xml IMF e-Library