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The network structure of the CDS market and its determinants

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  • Peltonen, Tuomas A.
  • Scheicher, Martin
  • Vuillemey, Guillaume

Abstract

This paper analyses the network structure of the credit default swap (CDS) market and its determinants, using a unique dataset of bilateral notional exposures on 642 financial and sovereign reference entities. We find that the CDS network is centred around 14 major dealers, exhibits a “small world” structure and a scale-free degree distribution. A large share of investors are net CDS buyers, implying that total credit risk exposure is fairly concentrated. Consistent with the theoretical literature on the use of CDS, the debt volume outstanding and its structure (maturity and collateralization), the CDS spread volatility and market beta, as well as the type (sovereign/financial) of the underlying bond are statistically significantly related—with expected signs—to structural characteristics of the CDS market.

Suggested Citation

  • Peltonen, Tuomas A. & Scheicher, Martin & Vuillemey, Guillaume, 2014. "The network structure of the CDS market and its determinants," Journal of Financial Stability, Elsevier, vol. 13(C), pages 118-133.
  • Handle: RePEc:eee:finsta:v:13:y:2014:i:c:p:118-133
    DOI: 10.1016/j.jfs.2014.05.004
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    Keywords

    Credit default swap (CDS); Financial networks; Network topology; Credit risk;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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