The impact of central clearing on the market for single-name credit default swaps
58 Pages Posted: 12 May 2018 Last revised: 15 Dec 2020
Date Written: September 24, 2020
In this article, we revisit the impact of the voluntary central clearing scheme on the CDS market. In order to address the endogeneity problem, we use a robust methodology that relies on dynamic propensity-score matching combined with generalized difference-in-differences. Our empirical findings show that central clearing results in a small increase in CDS spreads (ranging from 14 to 19 bps), while there is no evidence of an associated improvement in CDS market liquidity and trading activity or of a deterioration in the default risk of the underlying bond. These results suggest that the increase in CDS spreads can be mainly attributed to a reduction in CDS counterparty risk.
Keywords: Credit default swaps, central clearing, counterparty risk, liquidity, trading activity, bond default spread, difference-in-differences, parallel trend.
JEL Classification: G12, G13, G14, G18, G28
Suggested Citation: Suggested Citation