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Credit Default Swaps and the Market for Sovereign Debt

53 Pages Posted: 16 Mar 2011 Last revised: 30 Oct 2014

Iuliana Ismailescu

Pace University - Lubin School of Business

Blake Phillips

University of Waterloo

Date Written: April 30, 2013

Abstract

We analyze the determinants and effects of credit default swap (CDS) trading initiation on sovereign bonds. For high default risk countries, CDS initiation provides significant price efficiency benefits in the underlying market. CDS initiation also reduces average risk premiums, with reductions in borrowing costs likewise increasing with default risk. CDS trading initiation is more likely following increases in local equity index volatility, the volatility risk premium, or index spreads for regional or global CDS markets and decreases in a country’s ability to service foreign debt. Our results are robust to selection bias controls based on these factors.

Keywords: sovereign bond, market efficiency, borrowing costs, credit default swap, credit derivative

JEL Classification: G12, G14, G15, G20

Suggested Citation

Ismailescu, Iuliana and Phillips, Blake, Credit Default Swaps and the Market for Sovereign Debt (April 30, 2013). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1785376 or http://dx.doi.org/10.2139/ssrn.1785376

Iuliana Ismailescu

Pace University - Lubin School of Business ( email )

One Pace Plaza
New York, NY 10038
United States
212-618-6524 (Phone)

Blake Phillips (Contact Author)

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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