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Naked CDS Bans and the Bond Market: Empirical Evidence

Author

Listed:
  • Batchimeg Sambalaibat

    (Princeton University)

Abstract

During the 2010-2012 sovereign debt crisis in Europe, policy makers responded to the controversy surrounding CDS by implementing a series of policies that banned naked CDS trading. These policies serve as quasi-natural experiments that allow us to empirically identify the effect of naked CDS trading on the underlying bonds. We document that a temporary CDS ban increased bond market liquidity while a permanent ban decreased bond market liquidity. Thus, permanent versus temporary bans had opposite effects. An important policy implication is that permanently banning naked CDS trading adversely affected bond market liquidity, depressed bond prices, and thereby increased sovereign’s borrowing cost exactly when governments were trying to avert a liquidity dry-up and credit risk spiral.

Suggested Citation

  • Batchimeg Sambalaibat, 2019. "Naked CDS Bans and the Bond Market: Empirical Evidence," Working Papers 2019-8, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2019-8
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    More about this item

    Keywords

    Europe; Debt; CDS trading; Bond Market; Sovereign Debt;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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