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Safe-Haven CDS Premiums

62 Pages Posted: 12 Dec 2014 Last revised: 30 Sep 2016

Sven Klingler

BI Norwegian Business School

David Lando

Copenhagen Business School - Department of Finance

Date Written: September 28, 2016

Abstract

We develop a model in which a derivatives-dealing bank faces capital charges from uncollateralized swap positions with sovereigns, and buys Credit Default Swap (CDS) contracts to obtain capital relief. CDS premiums depend on margin requirements for buyers and sellers of CDS contracts, the value of capital relief for the dealer banks, and the return on a risky asset. We explain the regulatory requirements that lead derivatives dealers to buy CDS and translate volumes of derivatives contracts outstanding between sovereigns and banks into CDS hedging demand. We argue that CDS premiums for safe sovereigns are primarily driven by regulatory requirements.

Keywords: CDS premiums, Capital charges, CVA, CDS-bond basis

JEL Classification: F34, G12, G15

Suggested Citation

Klingler, Sven and Lando, David, Safe-Haven CDS Premiums (September 28, 2016). Available at SSRN: https://ssrn.com/abstract=2536632 or http://dx.doi.org/10.2139/ssrn.2536632

Sven Klingler (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

David Lando

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45 3815 3600 (Fax)

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