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The Long and Short of It: The Post-Crisis Corporate CDS Market

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The authors establish key stylized facts about the post-crisis evolution of trading and pricing of credit default swaps. Using supervisory contract-level data, they show that dealers became net buyers of credit protection starting in the second half of 2014, both through reducing the amount of protection they sell in the single-name market and switching to buying protection in the index market. More generally, they argue that considering simultaneous positions in different types of credit derivatives is crucial for understanding institutions’ decisions to participate in these markets and how these decisions affect prices.

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  • 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.
  • Handle: RePEc:fip:fednep:88216
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    1. Loon, Yee Cheng & Zhong, Zhaodong (Ken), 2016. "Does Dodd-Frank affect OTC transaction costs and liquidity? Evidence from real-time CDS trade reports," Journal of Financial Economics, Elsevier, vol. 119(3), pages 645-672.
    2. Jennie Bai & Or Shachar, 2015. "The Effects of Entering and Exiting a Credit Default Swap Index," Liberty Street Economics 20150330, Federal Reserve Bank of New York.
    3. Gehde-Trapp, Monika & Gündüz, Yalin & Nasev, Julia, 2015. "The liquidity premium in CDS transaction prices: Do frictions matter?," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 184-205.
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    5. Arora, Navneet & Gandhi, Priyank & Longstaff, Francis A., 2012. "Counterparty credit risk and the credit default swap market," Journal of Financial Economics, Elsevier, vol. 103(2), pages 280-293.
    6. 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.
    7. Emil N. Siriwardane, 2019. "Limited Investment Capital and Credit Spreads," Journal of Finance, American Finance Association, vol. 74(5), pages 2303-2347, October.
    8. Jean Helwege & Samuel Maurer & Asani Sarkar & Yuan Wang, 2009. "Credit default swap auctions," Staff Reports 372, Federal Reserve Bank of New York.
    9. Sang Byung Seo & Jessica A. Wachter, 2018. "Do Rare Events Explain CDX Tranche Spreads?," Journal of Finance, American Finance Association, vol. 73(5), pages 2343-2383, October.
    10. Pierre Collin-Dufresne & Robert S. Goldstein & Fan Yang, 2012. "On the Relative Pricing of Long-Maturity Index Options and Collateralized Debt Obligations," Journal of Finance, American Finance Association, vol. 67(6), pages 1983-2014, December.
    11. He, Zhiguo & Kelly, Bryan & Manela, Asaf, 2017. "Intermediary asset pricing: New evidence from many asset classes," Journal of Financial Economics, Elsevier, vol. 126(1), pages 1-35.
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    Cited by:

    1. Senay Agca & John Birge & Zi'ang Wang & Jing Wu, 2021. "The Impact of COVID-19 on Supply Chain Credit Risk," Working Papers 2021-19, The George Washington University, Institute for International Economic Policy.

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    More about this item

    Keywords

    credit derivatives; CDS transactions; CDS positions; dealer market power; credit default swaps;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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