Determinants of CDS Trading on Major Banks
Posted: 26 Jul 2018 Last revised: 23 Dec 2022
Date Written: August 26, 2019
Abstract
This paper empirically investigates determinants of the outstanding net notional amount
of credit default swaps (CDSs) contracts written on banks. We extend and complement the
previous literature dealing with CDS trading by analyzing a comprehensive set of CDS tradingspecific,
bank-fundamental, macroeconomic and bank-institutional determinants. We find that
risk hedging clearly dominates an investor’s speculation and arbitrage motive, while the latter,
however, exhibits the strongest impact on the outstanding net notional amount of bank CDSs.
Furthermore, being classified as a G-SIB, being a constituent of the main CDS index and the
equity trading volume may significantly explain changes in the outstanding CDS net notional on
banks. The analysis at hand provides important implications for both academics and practitioners,
since understanding the trading motives of bank CDS investors provides a deeper insight into the
opaque CDS market.
Keywords: banking, outstanding CDS net notional, determinants of bank CDS trading
JEL Classification: G10, G12, G21
Suggested Citation: Suggested Citation