IDEAS home Printed from https://ideas.repec.org/a/eme/jrfpps/v15y2014i5p482-509.html
   My bibliography  Save this article

Characteristics and development of corporate and sovereign CDS

Author

Listed:
  • Christina E. Bannier
  • Thomas Heidorn
  • Heinz-Dieter Vogel

Abstract

Purpose - – This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime crisis of 2007/2008 and, particularly, the European debt crisis 2009/2010 led to a differential development on corporate and sovereign CDS markets and investigates the primary use (speculative risk-trading or risk-hedging) of the two markets in recent years. Design/methodology/approach - – The authors use aggregate market data on the size of the respective markets and on the structure of market participants and their changes over time to assess the main research question. They enhance existing data from public sources such as the Bank for International Settlements and Depository Trust and Clearing Corporation with their own statistics on European sovereign CDS and combine their conclusions with observations regarding standardisation efforts and regulatory changes in the CDS market. Findings - – The authors show that after the subprime crisis 2007/2008 and the European debt crisis 2009/2010, the corporate and sovereign CDS markets developed quite differently. They provide evidence that since mid-2010, market participants started to use the sovereign CDS market more strongly for speculative purposes than for risk-hedging. This shows both in the shift of risk-quality of sovereign CDS contracts and in the changing structure of market participants. The ongoing standardisation and regulation in the CDS market – leading to further increases in transparency and reductions in transaction costs – may be expected to trigger a similar change also for corporate CDS. Originality/value - – Based on a broad variety of market infrastructure data, the authors show a diverging development of corporate and sovereign CDS markets in Europe in recent years. Particularly the sovereign CDS market appears to have shifted from a risk-hedging instrument to being used more strongly for speculative risk-trading. The authors combine their findings with recent regulatory action and market standardisation schemes and draw conclusions for the future development of CDS markets.

Suggested Citation

  • Christina E. Bannier & Thomas Heidorn & Heinz-Dieter Vogel, 2014. "Characteristics and development of corporate and sovereign CDS," Journal of Risk Finance, Emerald Group Publishing, vol. 15(5), pages 482-509, November.
    • Handle: RePEc:eme:jrfpps:v:15:y:2014:i:5:p:482-509
    as

    Download full text from publisher

    File URL: http://www.emeraldinsight.com/10.1108/JRF-06-2014-0077?utm_campaign=RePEc&WT.mc_id=RePEc
    Download Restriction: Access to full text is restricted to subscribers

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Robert A. Jarrow, 2011. "The Economics of Credit Default Swaps," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 235-257, December.
    2. Frank Heyde & Ulrike Neyer, 2010. "Credit Default Swaps and the Stability of the Banking Sector-super-," International Review of Finance, International Review of Finance Ltd., vol. 10(s1), pages 27-61.
    3. Dawood Ashraf & Yener Altunbas & John Goddard, 2007. "Who Transfers Credit Risk? Determinants of the Use of Credit Derivatives by Large US Banks," The European Journal of Finance, Taylor & Francis Journals, vol. 13(5), pages 483-500.
    4. Delatte, Anne-Laure & Gex, Mathieu & López-Villavicencio, Antonia, 2012. "Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis?," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 481-497.
    5. Darrell, Duffie, 2010. "The Failure Mechanics of Dealer Banks," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 131-153.
    6. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
    7. Bedendo, Mascia & Bruno, Brunella, 2012. "Credit risk transfer in U.S. commercial banks: What changed during the 2007–2009 crisis?," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3260-3273.
    8. Boone, L. & Fransolet, L. & Willemann, S., 2010. "Euro public debt and the markets: sovereign fundamentals and CDS market dynamics," Financial Stability Review, Banque de France, issue 14, pages 19-26, July.
    9. Stulz, Rene, 2010. "Credit default Swaps and the Credit Crisis," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 157-175.
    10. Acharya, Viral V. & Johnson, Timothy C., 2007. "Insider trading in credit derivatives," Journal of Financial Economics, Elsevier, vol. 84(1), pages 110-141, April.
    11. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2013. "Shackling Short Sellers: The 2008 Shorting Ban," Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1363-1400.
    12. Nijskens, Rob & Wagner, Wolf, 2011. "Credit risk transfer activities and systemic risk: How banks became less risky individually but posed greater risks to the financial system at the same time," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1391-1398, June.
    13. Duquerroy, A. & Gauthier, N. & Gex, M., 2009. "Credit default swaps and financial stability: risks and regulatory issues," Financial Stability Review, Banque de France, issue 13, pages 75-88, September.
    14. Fontana, Alessandro & Scheicher, Martin, 2016. "An analysis of euro area sovereign CDS and their relation with government bonds," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 126-140.
    15. Bernadette Minton & René Stulz & Rohan Williamson, 2009. "How Much Do Banks Use Credit Derivatives to Hedge Loans?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 35(1), pages 1-31, February.
    16. Joshua Slive & Jonathan Witmer & Elizabeth Woodman, 2012. "Liquidity and Central Clearing: Evidence from the CDS Market," Staff Working Papers 12-38, Bank of Canada.
    17. Laura Chiaramonte & Barbara Casu, 2013. "The determinants of bank CDS spreads: evidence from the financial crisis," The European Journal of Finance, Taylor & Francis Journals, vol. 19(9), pages 861-887, October.
    18. International Monetary Fund, 2012. "Mexico; Detailed Assessment of Observance of International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation," IMF Staff Country Reports 2012/068, International Monetary Fund.
    19. Haibin Zhu, 2004. "An empirical comparison of credit spreads between the bond market and the credit default swap market," BIS Working Papers 160, Bank for International Settlements.
    20. Kathryn Chen & Michael J. Fleming & John Jackson & Ada Li & Asani Sarkar, 2011. "An analysis of CDS transactions: implications for public reporting," Staff Reports 517, Federal Reserve Bank of New York.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roshanthi Dias, 2017. "The role of managerial risk-taking in the ‘rise and fall’ of the CDS market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57, pages 117-145, April.
    2. Vogel, Heinz-Dieter & Bannier, Christina E. & Heidorn, Thomas, 2013. "Functions and characteristics of corporate and sovereign CDS," Frankfurt School - Working Paper Series 203, Frankfurt School of Finance and Management.
    3. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    4. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. González, Luís Otero & Rodríguez Gil, Luís Ignacio & Martorell Cunill, Onofre & Merigó Lindahl, José M., 2016. "The effect of financial innovation on European banks' risk," Journal of Business Research, Elsevier, vol. 69(11), pages 4781-4786.
    6. da Silva, Paulo Pereira & Rebelo, Paulo Tomaz & Afonso, Cristina, 2014. "Tail dependence of financial stocks and CDS markets: Evidence using copula methods and simulation-based inference," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-27.
    7. Rubia, Antonio & Sanchis-Marco, Lidia & Serrano, Pedro, 2016. "Market frictions and the pricing of sovereign credit default swaps," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 223-252.
    8. Montes, Gabriel Caldas & Souza, Ivan, 2020. "Sovereign default risk, debt uncertainty and fiscal credibility: The case of Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    9. Oehmke, Martin & Zawadowski, Adam, 2017. "The anatomy of the CDS market," LSE Research Online Documents on Economics 66279, London School of Economics and Political Science, LSE Library.
    10. Shim, Ilhyock & Zhu, Haibin, 2014. "The impact of CDS trading on the bond market: Evidence from Asia," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 460-475.
    11. Jitmaneeroj, Boonlert, 2018. "Is Thailand’s credit default swap market linked to bond and stock markets? Evidence from the term structure of credit spreads," Research in International Business and Finance, Elsevier, vol. 46(C), pages 324-341.
    12. Norden, Lars, 2017. "Information in CDS spreads," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 118-135.
    13. Avino, Davide & Cotter, John, 2013. "Sovereign and bank CDS spreads: two sides of the same coin for European bank default predictability?," MPRA Paper 56782, University Library of Munich, Germany.
    14. Avino, Davide & Cotter, John, 2014. "Sovereign and bank CDS spreads: Two sides of the same coin?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 72-85.
    15. Arnold, M., 2017. "The impact of central clearing on banks’ lending discipline," Journal of Financial Markets, Elsevier, vol. 36(C), pages 91-114.
    16. Santiago Forte & Lidija Lovreta, 2015. "Time†Varying Credit Risk Discovery in the Stock and CDS Markets: Evidence from Quiet and Crisis Times," European Financial Management, European Financial Management Association, vol. 21(3), pages 430-461, June.
    17. Das, Sanjiv & Kalimipalli, Madhu & Nayak, Subhankar, 2014. "Did CDS trading improve the market for corporate bonds?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 495-525.
    18. Annaert, Jan & De Ceuster, Marc & Van Roy, Patrick & Vespro, Cristina, 2013. "What determines Euro area bank CDS spreads?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 444-461.
    19. Bakoush, Mohamed & Abouarab, Rabab & Wolfe, Simon, 2019. "Disentangling the impact of securitization on bank profitability," Research in International Business and Finance, Elsevier, vol. 47(C), pages 519-537.
    20. Martin, Xiumin & Roychowdhury, Sugata, 2015. "Do financial market developments influence accounting practices? Credit default swaps and borrowers׳ reporting conservatism," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 80-104.

    More about this item

    Keywords

    Corporate CDS; Credit default swaps; European sovereign CDS; Risk-hedging; Risk-trading; Speculation; G12;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:jrfpps:v:15:y:2014:i:5:p:482-509. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman). General contact details of provider: http://www.emerald.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.