The price impact of CDS trading
AbstractIn this paper we show that informational and real frictions in CDS markets strongly affect CDS premia. We derive this main finding using a proprietary set of individual CDS transactions cleared by the Depository Trust & Clearing Corporation. We first show that CDS traders adjust the CDS premium in response to the observed order flow. Buy orders lead to an increase of the premium and sell orders to a decrease, suggesting that the order flow carries information. Second, we show that trader adjusts the premium more for transactions with higher inventory risk. Third, we show that the trader adjusts the premium in the way described only if she trades with buyside investors which presumably have less market power. Overall, our results imply that CDS premia contain a significant non-default related component which CDS traders charge to protect themselves against informational and real frictions. --
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Bibliographic InfoPaper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 12-12 [rev.].
Date of creation: 2013
Date of revision:
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CDS; frictions; asymmetric information; inventory risk; market power;
Other versions of this item:
- Gündüz, Yalin & Nasev, Julia & Trapp, Monika, 2013. "The price impact of CDS trading," Discussion Papers 20/2013, Deutsche Bundesbank, Research Centre.
- Gündüz, Yalin & Nasev, Julia & Trapp, Monika, 2012. "The price impact of CDS trading," CFR Working Papers 12-12, University of Cologne, Centre for Financial Research (CFR).
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-09 (All new papers)
- NEP-FMK-2013-03-09 (Financial Markets)
- NEP-MST-2013-03-09 (Market Microstructure)
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