Default contagion undermines popular collateralization strategies for credit default swaps.
The article explores how the risk of one company defaulting can affect the value of credit default swaps. By using a specific model, the researchers found that default contagion significantly impacts the effectiveness of common collateralization strategies. They also developed new strategies that better consider this contagion effect. Overall, the study shows that default contagion plays a crucial role in determining the success of collateralization methods for credit default swaps.