How Trade Matching Forms in the Credit Default Swap Market

43 Pages Posted: 25 Sep 2015 Last revised: 9 Feb 2019

See all articles by Jun Sung Kim

Jun Sung Kim

Monash University - Department of Econometrics & Business Statistics

Gerardo Ferrara

Bank of England

Bonsoo Koo

Monash Business School

Zijun Liu

Bank of England

Date Written: February 3, 2019

Abstract

We investigate how the pairing of dealers and customers in credit default swap (CDS) transactions is influenced by the participants’ characteristics. Using data from the Depository Trust & Clearing Corporation on trade matching decisions in the UK CDS market, we employ a matching/network formation framework to uncover participant preferences. We also extend the reference-entity-specific approach by applying a panel fixed effects model to attain, in combination, a comprehensive understanding of the formation of the UK CDS network. The matching/network formation approach supports the theoretical prediction that the UK CDS market is congregating on a small number of market participants that are able to offer lower transaction costs due to economies of scale. Our reference-entity-specific analysis finds that network formation is an outcome of the interplay between hedging and speculative purposes in the UK CDS market.

Keywords: Credit default swap; Matching; Network formation; Financial network

JEL Classification: G10, G20, C13, D85

Suggested Citation

Kim, Jun Sung and Ferrara, Gerardo and Koo, Bonsoo and Liu, Zijun, How Trade Matching Forms in the Credit Default Swap Market (February 3, 2019). Available at SSRN: https://ssrn.com/abstract=2665511 or http://dx.doi.org/10.2139/ssrn.2665511

Jun Sung Kim (Contact Author)

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Gerardo Ferrara

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bonsoo Koo

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia
+61 3 9905 0547 (Phone)
+61 3 9905 5474 (Fax)

Zijun Liu

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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