The Impact of Central Clearing on the Market for Single-Name Credit Default Swaps
56 Pages Posted: 12 May 2018 Last revised: 31 Jan 2019
Date Written: January 25, 2019
In this paper, 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 (estimated at 19 bps) in CDS spreads, 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.
JEL Classification: G12, G13, G14, G18, G28
Suggested Citation: Suggested Citation