The Impact of Central Clearing on the Pricing of Sovereign Credit Default Swaps
33 Pages Posted: 9 Jul 2019
Date Written: July 5, 2019
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
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