The Transaction Costs of Trading Corporate Credit

48 Pages Posted: 2 Dec 2014 Last revised: 4 Mar 2015

See all articles by Gopa Biswas

Gopa Biswas

Government of the United States of America - Office of Financial Research

Stanislava (Stas) Nikolova

University of Nebraska - Lincoln

Christof W. Stahel

ICI

Date Written: March 1, 2015

Abstract

To examine whether corporate credit risk is cheaper to trade in the bond or credit-default swap (CDS) market, we estimate individual roundtrip transaction costs for 851 CDSs traded during 2009-2014. Effective half-spreads are 14 bps of the notional amount for dealer-to-enduser and 12 bps for dealer-to-dealer trades for the most common notional traded, $2.5-7.5M. Cross-sectionally, effective spreads are weakly correlated with indicative quoted spreads, higher for more actively traded contracts, and related to reference obligation/entity characteristics. For institutional-size trades up to $500K, bonds are three times as expensive as the corresponding CDSs, but at larger trade sizes this pattern reverses.

Keywords: Credit Risk, Credit Default Swaps, Bonds, Liquidity, Transaction Costs

JEL Classification: G11, G12, G14

Suggested Citation

Biswas, Gopa and Nikolova, Stanislava (Stas) and Stahel, Christof W., The Transaction Costs of Trading Corporate Credit (March 1, 2015). Available at SSRN: https://ssrn.com/abstract=2532805 or http://dx.doi.org/10.2139/ssrn.2532805

Gopa Biswas

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Stanislava (Stas) Nikolova (Contact Author)

University of Nebraska - Lincoln ( email )

Lincoln, NE 68588-0490
United States
402-472-6049 (Phone)

Christof W. Stahel

ICI ( email )

1401 H St NW
DC District Of Columbia 20005
United States

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