Determinants of the Size of the Sovereign Credit Default Swap Market
36 Pages Posted: 13 Dec 2012 Last revised: 18 Jan 2015
Date Written: January 17, 2015
We analyze the sovereign CDS market for 57 countries, using a novel dataset comprising weekly positions and turnover data. We document that CDS markets - measured relative to a country's debt - are larger for smaller countries, countries with a rating just above the investment-grade cutoff, and countries with weaker creditor rights. Analyzing changes in credit risk, we find that rating changes matter but only for negative rating events (downgrades and negative outlooks). In particular, weeks with downgrades and negative outlooks are associated with a significantly higher turnover in the sovereign CDS market - even after controlling for changes in sovereign CDS spreads. We conclude that agencies' ratings are a major determinant of the size of the sovereign credit default swap market.
Keywords: Sovereign Credit Default Swaps, Sovereign CDS Trading Volume, DTCC Data, Sovereign Credit Ratings
JEL Classification: F34, G12
Suggested Citation: Suggested Citation