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Credit Default Swaps and Credit Risk Reallocation

Author

Listed:
  • Dorian Henricot
  • Thibaut Piquard

Abstract

We use data on granular holdings of debt and Credit Default Swaps (CDS) referencing non-financial corporations across financial investors, to investigate how CDS reallocate credit risk and whether this increases investor-level riskiness. To guide our investigation, we propose a methodology to disentangle CDS positions between three strategies: hedging, speculation, and arbitrage. In our dataset, arbitrage remains anecdotal. We find that CDS reduce exposure concentration, as hedgers shed off their most concentrated exposures, while speculators substitute debt for CDS. CDS also facilitate risk-taking by speculators. Overall, CDS increase portfolio risk metrics, due to a limited effect of hedging strategies compared to speculative ones.

Suggested Citation

  • Dorian Henricot & Thibaut Piquard, 2022. "Credit Default Swaps and Credit Risk Reallocation," Working papers 860, Banque de France.
    • Handle: RePEc:bfr:banfra:860
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/wp860.pdf
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    Cited by:

    1. Martijn Boermans, 2022. "A literature review of securities holdings statistics research and a practitioner’s guide," Working Papers 757, DNB.

    More about this item

    Keywords

    Credit Default Swaps; Credit Risk;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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