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

See all articles by Mohamed-Ali Akari

Mohamed-Ali Akari

HEC Montreal

Ramzi Ben-Abdallah

University of Quebec at Montreal - School of Management - Department of Finance

Michèle Breton

HEC Montreal - Department of Management Sciences

Georges Dionne

HEC Montreal - Department of Finance

Date Written: January 25, 2019

Abstract

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

Akari, Mohamed-Ali and Ben-Abdallah, Ramzi and Breton, Michèle and Dionne, Georges, The Impact of Central Clearing on the Market for Single-Name Credit Default Swaps (January 25, 2019). Available at SSRN: https://ssrn.com/abstract=3171253 or http://dx.doi.org/10.2139/ssrn.3171253

Mohamed-Ali Akari

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

Ramzi Ben-Abdallah

University of Quebec at Montreal - School of Management - Department of Finance ( email )

315 Sainte-Catherine East
Montreal, Quebec H2X 3X2
Canada
(514) 987-3000 # 2821 (Phone)
(514) 987-0422 (Fax)

Michèle Breton

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada
514-340-6490 (Phone)
514-340-5634 (Fax)

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

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