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Understanding transactions prices in the credit default swaps market

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  • Tang, Dragon Yongjun
  • Yan, Hong

Abstract

The price determination of over-the-counter derivatives is a major concern for market participants and policy makers since the recent global financial crisis, which triggered substantial law-making and new regulations. We use a unique, comprehensive dataset to examine the tick-by-tick price changes associated with both trades and quotes on credit default swaps (CDS). We find that, while fundamental factors such as volatility are important drivers of CDS spread changes, especially during the crisis period, CDS spread movements are also affected by supply–demand imbalance and market liquidity, reflecting the impact of slow-moving capital, as well as the capacity constraints of financial intermediation.

Suggested Citation

  • Tang, Dragon Yongjun & Yan, Hong, 2017. "Understanding transactions prices in the credit default swaps market," Journal of Financial Markets, Elsevier, vol. 32(C), pages 1-27.
    • Handle: RePEc:eee:finmar:v:32:y:2017:i:c:p:1-27
    DOI: 10.1016/j.finmar.2016.09.005
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    Cited by:

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    3. Nina Boyarchenko & Anna M. Costello & Or Shachar, 2020. "The Long and Short of It: The Post-Crisis Corporate CDS Market," Economic Policy Review, Federal Reserve Bank of New York, vol. 26(3), pages 1-49, June.
    4. Jose E. Gomez-Gonzalez & Jorge M. Uribe & Oscar M. Valencia, 2023. "Risk spillovers between global corporations and Latin American sovereigns: global factors matter," Applied Economics, Taylor & Francis Journals, vol. 55(13), pages 1477-1496, March.
    5. Gündüz, Yalin, 2020. "The market impact of systemic risk capital surcharges," Discussion Papers 09/2020, Deutsche Bundesbank.
    6. Jungmu Kim & Yuen Jung Park, 2020. "Predictability of OTC Option Volatility for Future Stock Volatility," Sustainability, MDPI, vol. 12(12), pages 1-23, June.
    7. Bikramaditya Ghosh & Spyros Papathanasiou & Dimitrios Kenourgios, 2022. "Cross-Country Linkages and Asymmetries of Sovereign Risk Pluralistic Investigation of CDS Spreads," Sustainability, MDPI, vol. 14(21), pages 1-10, October.
    8. Pereira, John & Sorwar, Ghulam & Nurullah, Mohamed, 2018. "What drives corporate CDS spreads? A comparison across US, UK and EU firms," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 188-200.

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    More about this item

    Keywords

    G12; G13; G23; Credit default swap; CDS; Over-the-counter; Transactions prices;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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