Credit Market Choice

66 Pages Posted: 7 Aug 2018

See all articles by Nina Boyarchenko

Nina Boyarchenko

Federal Reserve Bank of New York

Anna M. Costello

University of Michigan, Stephen M. Ross School of Business

Or Shachar

Federal Reserve Bank of New York

Date Written: August , 2018

Abstract

Which markets do institutions use to change exposure to credit risk? Using a unique data set of transactions in corporate bonds and credit default swaps (CDS) by large financial institutions, we show that simultaneous transactions in both markets are rare, with an average institution having an 11 percent probability of transacting in both the CDS and bond markets in the same entity in an average week. When institutions do transact in both markets simultaneously, they increase their speculative positions in CDS by 13 cents per dollar of bond transactions, and their hedging positions by 13 cents per dollar of bond transactions. We find evidence that, during the post-crisis rule implementation period, the incentive to use paired transactions is reduced but so is the incentive to take naked positions in the CDS market. When single name contracts become eligible for central clearing, globally systemically important institutions become more likely to use single name CDS contracts. Finally, we show that, in the aggregate, U.S. globally systemically important institutions reduce their exposure to corporate credit risk in the rule implementation period, primarily through reducing the amount of credit protection sold in the index CDS market.

Keywords: CDS, corporate bonds, hedging, regulation, CCPs

JEL Classification: G11, G18, G20, G28

Suggested Citation

Boyarchenko, Nina and Costello, Anna M. and Shachar, Or, Credit Market Choice (August , 2018). FRB of New York Staff Report No. 863, Available at SSRN: https://ssrn.com/abstract=3226951 or http://dx.doi.org/10.2139/ssrn.3226951

Nina Boyarchenko (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
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212-720-7339 (Phone)
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Anna M. Costello

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Or Shachar

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6974 (Phone)
(212) 720-1582 (Fax)

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