Limited Investment Capital and Credit Spreads

57 Pages Posted: 25 Mar 2015 Last revised: 18 Jun 2018

See all articles by Emil Siriwardane

Emil Siriwardane

Harvard Business School - Finance Unit

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

Suggested Citation

Siriwardane, Emil, Limited Investment Capital and Credit Spreads (June 1, 2018). Harvard Business School Finance Working Paper No. 16-007, Journal of Finance, Forthcoming, Available at SSRN: or

Emil Siriwardane (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

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