Financial Innovation and Financial Intermediation: Evidence from Credit Default Swaps

67 Pages Posted: 14 Jan 2019 Last revised: 8 Nov 2019

See all articles by Alexander W. Butler

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Xiang Gao

University of North Dakota

Cihan Uzmanoglu

Binghamton University, The State University of New York

Date Written: November 7, 2019

Abstract

We study the influence of credit default swaps (CDS) trading on the costs of bond intermediation. After CDS initiation, CDS firms pay 12-28% (8-20 basis points) lower underwriting fees than similar non-CDS firms do. Underwriting fees decline more for riskier issuers and illiquid bonds for which the ability to hedge with CDS is more valuable. In bond offerings, participation by investors facing risk-based regulatory requirements increases after CDS initiation. Our evidence suggests that CDS-driven innovations in risk sharing contribute to the transactional efficiency of the market by reducing the financial intermediation costs of placing bonds.

Keywords: Credit default swaps; Financial innovation; Financial intermediation; Underwriting fees; Issuance costs; Corporate bonds; Hedging credit risk; Transaction costs; Bond Ownership

JEL Classification: G20; G24; G32

Suggested Citation

Butler, Alexander W. and Gao, Xiang and Uzmanoglu, Cihan, Financial Innovation and Financial Intermediation: Evidence from Credit Default Swaps (November 7, 2019). Available at SSRN: https://ssrn.com/abstract=2902884 or http://dx.doi.org/10.2139/ssrn.2902884

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Xiang Gao

University of North Dakota ( email )

Box 7096
Grand Forks, ND 58202
United States

Cihan Uzmanoglu (Contact Author)

Binghamton University, The State University of New York ( email )

Binghamton, NY 13902-6001
United States
607 777 66 38 (Phone)

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