The Anatomy of the CDS Market

Review of Financial Studies, Forthcoming

60 Pages Posted: 16 Mar 2012 Last revised: 26 Oct 2016

See all articles by Martin Oehmke

Martin Oehmke

London School of Economics & Political Science (LSE) - Department of Finance

Adam Zawadowski

Boston University - Department of Finance & Economics

Date Written: April 25, 2016

Abstract

Using novel position and trading data for single-name corporate credit default swaps (CDSs), we provide evidence that CDS markets emerge as “alternative trading venues” that serve a standardization and liquidity role. CDS positions and trading volume are larger for firms with bonds that are fragmented into many separate issues and have heterogeneous contractual terms. Whereas hedging motives are associated with trading volume in the bond and CDS markets, speculative trading concentrates in the CDS. Cross-market arbitrage links the CDS and bond market via the basis trade, compressing the negative CDS-bond basis and reducing price impact in the bond market.

Keywords: credit default swaps, CDS positions, hedging, speculation, DTCC data, bond liquidity

Suggested Citation

Oehmke, Martin and Zawadowski, Adam, The Anatomy of the CDS Market (April 25, 2016). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2023108 or http://dx.doi.org/10.2139/ssrn.2023108

Martin Oehmke

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Adam Zawadowski (Contact Author)

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

HOME PAGE: http://people.bu.edu/zawa

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