Safe-Haven CDS Premiums
82 Pages Posted: 12 Dec 2014 Last revised: 26 Jan 2018
Date Written: January 26, 2018
Credit Default Swaps can be used to lower capital requirements of dealer banks who enter into uncollateralized derivatives positions with sovereigns. We show in a model that the regulatory incentive to obtain capital relief makes CDS contracts valuable to dealer banks and empirically that, consistent with the use of CDS for regulatory purposes, there is a disconnect between changes in bond yield spreads and in CDS premiums especially for safe sovereigns. Additional empirical tests related to volumes of contracts outstanding, effects of regulatory proxies, and the corporate bond and CDS markets support that CDS contracts are used for capital relief.
Keywords: CDS premiums, Capital charges, CVA, CDS-bond basis
JEL Classification: F34, G12, G15
Suggested Citation: Suggested Citation