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The price impact of CDS trading

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  • Gündüz, Yalin
  • Nasev, Julia
  • Trapp, Monika

Abstract

In this paper we show that informational and real frictions in CDS markets strongly affect CDS premia. We derive this main finding using a proprietary set of individual CDS transactions cleared by the Depository Trust & Clearing Corporation. We first show that CDS traders adjust the CDS premium in response to the observed order flow. Buy orders lead to an increase of the premium and sell orders to a decrease, suggesting that the order flow carries information. Second, we show that traders adjust the premium more for transactions with higher inventory risk. Third, trading with buy-side investors who presumably have less market power increases this effect. Overall, our results imply that CDS premia contain a significant non-default related component which CDS traders charge to protect themselves against informational and real frictions.
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Suggested Citation

  • Gündüz, Yalin & Nasev, Julia & Trapp, Monika, 2012. "The price impact of CDS trading," CFR Working Papers 12-12, University of Cologne, Centre for Financial Research (CFR).
  • Handle: RePEc:zbw:cfrwps:1212
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    References listed on IDEAS

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    1. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
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    Cited by:

    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. Silva, Paulo Pereira da & Vieira, Carlos & Vieira, Isabel, 2015. "The determinants of CDS open interest dynamics," Journal of Financial Stability, Elsevier, vol. 21(C), pages 95-109.
    3. Pereira da Silva, Paulo & Vieira, Isabel & Vieira, Carlos, 2015. "M&A operations: Further evidence of informed trading in the CDS market," Journal of Multinational Financial Management, Elsevier, vol. 32, pages 116-130.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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