"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 data for single-name corporate CDSs, we provide evidence that CDS markets emerge as an "alternative trading venue" for firms with illiquid bond markets. CDS markets are more likely to exist and more heavily used when the bonds of the underlying firm are hard to trade. CDS positions are increasing in insurable interest (hedging demand) and disagreement (speculative demand); these effects are significantly stronger for firms with illiquid bond markets. We also find evidence suggestive of arbitrage activity linking the CDS and the bond market.
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