The Value of Trading Relationships and Networks in the CDS Market

28 Pages Posted: 20 Jan 2017 Last revised: 28 Mar 2017

See all articles by Diana Iercosan

Diana Iercosan

Board of Governors of the Federal Reserve System

Alexander Jiron

Board of Governors of the Federal Reserve System

Date Written: March 27, 2017

Abstract

We investigate execution quality issues in the OTC single-name credit default swap (CDS) market using confidential transactions-level trade repository data. Specifically, we analyze the impact of counterparties’ matching and negotiation abilities on the terms of trade of CDS contracts, under incomplete information about market liquidity and quotes. We show that execution cost of a CDS transaction, measured as the deviation of the traded CDS spread from the market consensus spread, is explained, in part, by the counterparties’ trading activity level, trading networks, and trading relationships. Further, we test the importance of these determinants of execution cost under stressed market conditions, such as a crisis regime, low trading volume and high market volatility.

Keywords: OTC Market, Execution Cost, Credit Default Swap

JEL Classification: G10, G12, G14, G20, G23, C13

Suggested Citation

Iercosan, Diana and Jiron, Alexander, The Value of Trading Relationships and Networks in the CDS Market (March 27, 2017). Available at SSRN: https://ssrn.com/abstract=2901743 or http://dx.doi.org/10.2139/ssrn.2901743

Diana Iercosan (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Alexander Jiron

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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