The Impact of Central Clearing on the Pricing of Sovereign Credit Default Swaps

33 Pages Posted: 9 Jul 2019

See all articles by Josephine Molleyres

Josephine Molleyres

University of Basel - Department of Finance

Heinz Zimmermann

University of Basel - Center for Economic Science (WWZ) - Department of Finance

Date Written: July 5, 2019

Abstract

Buyers of a credit default swap (CDS) are not only exposed to the credit risk of the underlying reference entity, but also to the default risk of the seller of the swap. The objective of this paper is to analyze the impact of the recent implementation of central counterparty clearing (CCP) on sovereign CDS spreads using a sample of European, US and Asian single-name credit default swaps between 2010 and 2017. The results indicate that CCP clearing diminishes the systemic risk in the CDS market by reducing counterparty risk as proxied by the credit risk of the major CDS dealers, but has no significant effect on CDS market liquidity. We also find that CDS spreads are mainly driven by local factors as opposed to global factors.

Keywords: credit default swaps, central counterparty clearing, sovereign credit risk

JEL Classification: G18, G32

Suggested Citation

Molleyres, Josephine and Zimmermann, Heinz, The Impact of Central Clearing on the Pricing of Sovereign Credit Default Swaps (July 5, 2019). Available at SSRN: https://ssrn.com/abstract=3415563 or http://dx.doi.org/10.2139/ssrn.3415563

Josephine Molleyres

University of Basel - Department of Finance ( email )

Peter-Merian Weg 6
Basel, CH-4051
Switzerland
+41612072451 (Phone)

HOME PAGE: http://wwz.unibas.ch/personen/profil/person/molleyres/

Heinz Zimmermann (Contact Author)

University of Basel - Center for Economic Science (WWZ) - Department of Finance ( email )

Peter Merian Weg 6
Basel, 4002
Switzerland
+41 61 267 33 16 (Phone)
+41 61 267 08 98 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
69
Abstract Views
1,218
rank
334,137
PlumX Metrics