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Determinants of the Size of the Sovereign Credit Default Swap Market

36 Pages Posted: 13 Dec 2012 Last revised: 18 Jan 2015

Tobias Berg

Frankfurt School of Finance & Management

Daniel Streitz

Copenhagen Business School

Date Written: January 17, 2015

Abstract

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

Berg, Tobias and Streitz, Daniel, Determinants of the Size of the Sovereign Credit Default Swap Market (January 17, 2015). Available at SSRN: https://ssrn.com/abstract=2188270 or http://dx.doi.org/10.2139/ssrn.2188270

Tobias Berg

Frankfurt School of Finance & Management ( email )

Sonnemannstra├če 9-11
Frankfurt am Main, 60314
Germany

Daniel Streitz (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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