Abstract

http://ssrn.com/abstract=2176561
 


 



The Impact of Central Clearing on Counterparty Risk, Liquidity, and Trading: Evidence from the Credit Default Swap Market


Yee Cheng Loon


State University of New York at Binghamton

Zhaodong Zhong


Rutgers University

August 20, 2013

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
This paper examines the impact of central clearing on the credit default swaps (CDS) market using a sample of voluntarily cleared single-name contracts. Consistent with central clearing reducing counterparty risk, CDS spreads increase around the commencement of central clearing and are lower than settlement spreads published by the central clearinghouse. Furthermore, the relation between CDS spreads and dealer credit risk weakens after central clearing begins, suggesting a lowering of systemic risk. These findings are robust to controls for frictions in both CDS and bond markets. Finally, matched sample analysis reveals that the increased post-trade transparency following central clearing is associated with an improvement in liquidity and trading activity.

Number of Pages in PDF File: 57

Keywords: Central Clearing, Counterparty Risk, Systemic Risk, Liquidity, Credit Default Swap

JEL Classification: G12, G13, G14, G18, G28

Accepted Paper Series


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Date posted: November 15, 2012 ; Last revised: November 13, 2013

Suggested Citation

Loon, Yee Cheng and Zhong, Zhaodong, The Impact of Central Clearing on Counterparty Risk, Liquidity, and Trading: Evidence from the Credit Default Swap Market (August 20, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=2176561 or http://dx.doi.org/10.2139/ssrn.2176561

Contact Information

Yee Cheng Loon
State University of New York at Binghamton ( email )
AA 208
School of Management
Binghamton, NY 13902-6000
United States
607-777-2376 (Phone)
607-777-4422 (Fax)
Zhaodong Zhong (Contact Author)
Rutgers University ( email )
Department of Finance, Rutgers Business School
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States
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