Corporate Credit Derivatives

46 Pages Posted: 7 Sep 2021

See all articles by George E. Batta

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: September 4, 2021

Abstract

Corporate credit derivatives, mainly referring to single-name or index credit default swaps or CDSs, are over-the-counter contracts between two counterparties (the “buyer” and “seller”) that offer protection against the default of a corporate “reference entity” or the defaults in a large credit portfolio for a combination of upfront and periodic payments, loosely referred to as the “CDS premium.” Credit derivatives became popular in the late 1990s and early 2000s as a way for financial institutions to reduce their regulatory capital requirement, and early research treated them as redundant securities whose pricing is tied to the underlying corporate bonds and equities, with liquidity and counterparty risk factors playing supplementary roles. Research in the 2010s and beyond, however, increasingly focused on the effects of market frictions on the pricing of CDSs, how CDS trading has impacted corporate behaviors and outcomes as well as the price efficiency and liquidity of other related markets, and the microstructure of the CDS market itself. This was made possible by the availability of market statistics and more granular trade and quote data as a result of the broad movement of the OTC derivatives market towards central clearing.

Keywords: Credit derivatives, credit default swaps, market frictions, informed trading, liquidity, market structure, CDS introductions, credit supply, empty creditors, time-varying treatment effects, causal inference

Suggested Citation

Batta, George E. and Yu, Fan, Corporate Credit Derivatives (September 4, 2021). Available at SSRN: https://ssrn.com/abstract=3917549 or http://dx.doi.org/10.2139/ssrn.3917549

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth Street
Claremont, CA 91711
United States

Fan Yu (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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