Limited Investment Capital and Credit Spreads
57 Pages Posted: 25 Mar 2015 Last revised: 18 Jun 2018
Date Written: June 1, 2018
Using proprietary credit default swap (CDS) data, I investigate how capital shocks at protection sellers impact pricing in the CDS market. Seller capital shocks — measured as CDS portfolio margin payments — account for 12 percent of the time-series variation in weekly spread changes, a significant amount given that standard credit factors account for 18 percent during my sample. In addition, seller shocks possess information for spreads that is independent of institution-wide measures of constraints. These findings imply a high degree of market segmentation, and suggest that frictions within specialized financial institutions prevent capital from flowing into the market at shorter horizons.
Keywords: credit default swaps, credit risk, intermediary based asset pricing, slow moving capital, limited risk bearing capacity
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