How Trade Matching Forms in the Credit Default Swap Market
43 Pages Posted: 25 Sep 2015 Last revised: 9 Feb 2019
Date Written: February 3, 2019
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: Suggested Citation