Template-type: ReDIF-Paper 1.0
Author-Name: Dr. Andrada Bilan
Author-Name-First: Andrada
Author-Name-Last: Bilan
Author-Person: pbi411
Author-Name: Yalin Gündüz
Author-Name-First: Yalin
Author-Name-Last: Gündüz
Title: CDS market structure and bond spreads
Abstract: We study the response of bond spreads to a liquidity supply shock in the credit default swap (CDS) market. Our identification strategy exploits the exogenous exit of a large dealer from the single-name CDS market as well as granular data on CDS transactions and bond portfolio holdings of German investors. Following the shock, CDS market liquidity declines and bond spreads increase, especially for the reference firms intermediated by the dealer. Individual portfolio data indicate hedging motives as a mechanism: as CDS insurance on their bond holdings becomes costlier, investors offload the bonds. Our results therefore show that frictions in derivative markets affect the underlying securities, which can raise firms' cost of capital.
Length: 35 pages
Creation-Date: 2022
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2022/working_paper_2022_09
File-Format: text/html
Number: 2022-09
Classification-JEL: G11, G18, G20, G28
Keywords: Credit default swaps, dealer markets, bonds markets, credit risk, Depository Trust and Clearing Corporation (DTCC)
Handle: RePEc:snb:snbwpa:2022-09