"The Anatomy of the CDS Market"
Publication type: Working paper
What is the economic role of the market for credit default swaps (CDSs)? Using novel position and trading data for single-name corporate CDSs, we provide evidence that CDS markets emerge as "alternative trading venues" for hedging and speculation: CDS markets are larger and more likely to exist for firms with bonds that are fragmented into many separate issues - suggesting a standardization and liquidity role of CDS markets. While hedging motives are associated with comparable trading volume in the bond and CDS markets, speculative trading volume is concentrated in the CDS market. Finally, we document arbitrage activity that links the CDS and the bond market via the basis trade.
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