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19
Did Liquidity Providers Become Liquidity Seekers? Evidence from the CDSBond Basis During the 2008 Financial Crisis. Working Paper
, 2014
"... The misalignment of corporate bond and credit default swap spreads (the CDS-bond basis) during the 2008 financial crisis is often attributed to corporate bond dealers ’ shed-ding inventory when liquidity was scarce. This paper documents evidence against this widespread perception. In the months foll ..."
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The misalignment of corporate bond and credit default swap spreads (the CDS-bond basis) during the 2008 financial crisis is often attributed to corporate bond dealers ’ shed-ding inventory when liquidity was scarce. This paper documents evidence against this widespread perception. In the months following Lehman’s collapse, dealers, including pro-prietary trading desks in investment banks, provided liquidity in response to major selling activity on the part of clients. The dealers ’ corporate bond inventories rose sharply as a result. Although providing liquidity, dealers did not trade aggressively enough to close the CDS-bond basis. We also show that declining corporate bond prices following Lehman’s collapse were concentrated in bonds with available CDS contracts and high levels of ac-tivity in basis trades, indicating that the presence of derivative contracts can disrupt the underlying cash market. Overall, our results suggest that the unwinding of CDS-bond basis trades by non-dealer arbitrageurs including hedge funds was the main cause of the large negative basis and the disruption of the credit market.
A Theory of Liquidity Spillover Between Bond and CDS Markets,” Working Paper
, 2014
"... I build a search model of bond and CDS markets that features en-dogenous funding liquidity and interdependent bond and CDS market liquidity. I show that, in the long run, speculative CDS purchases at-tract greater funding liquidity into credit markets that then, due to search frictions, spills over ..."
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I build a search model of bond and CDS markets that features en-dogenous funding liquidity and interdependent bond and CDS market liquidity. I show that, in the long run, speculative CDS purchases at-tract greater funding liquidity into credit markets that then, due to search frictions, spills over and increases bond market liquidity. In the short-run, however, the aggregate capital invested in credit markets remains fixed and, as a result, speculative CDS purchases attract liq-uidity away from the bond market. The opposite short- and long-run effects help explain the observed effects of speculative CDS bans on liquidity of the underlying bond markets. A large body of work explores, in the context of exchange traded assets, why financial derivatives exist and how they affect the underlying assets. A majority of asset classes, however, are traded over-the-counter (OTC).1 In the last decade, a significant research has emerged on liquidity and search frictions in OTC markets. Despite the insights from this literature, our understanding of the effects of derivatives is limited in the context of OTC
Credit Default Swaps- A Survey
, 2014
"... Credit default swaps (CDS) have been growing in importance in the global finan-cial markets. However, their role has been hotly debated, in industry and academia, particularly after the credit crisis of 2008-2009 and the European sovereign crisis of 2010-2012. We review the extant literature on CDS ..."
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Credit default swaps (CDS) have been growing in importance in the global finan-cial markets. However, their role has been hotly debated, in industry and academia, particularly after the credit crisis of 2008-2009 and the European sovereign crisis of 2010-2012. We review the extant literature on CDS that has accumulated over the past two decades. We divide our survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and con-ventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles as well as from that of structural and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has af-fected the characteristics of the related bond and equity markets, with an emphasis
Credit Default Swaps and Corporate Cash Holdings ∗
, 2013
"... The introduction of credit default swaps (CDS) trading on an underlying firm may influence its future access to external financing and, hence, its precautionary demand for cash. In this paper, we empirically estimate this effect of CDS trading, using a comprehensive sample of North American corporat ..."
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The introduction of credit default swaps (CDS) trading on an underlying firm may influence its future access to external financing and, hence, its precautionary demand for cash. In this paper, we empirically estimate this effect of CDS trading, using a comprehensive sample of North American corporate CDS introductions between 1997 and 2009. We show that corporate cash holdings, as a proportion of assets, increase after the inception of CDS trading. This impact is significant, even after controlling for the potential endogeneity of CDS trading. We also find that the increase in the cash-to-assets ratio is greater for firms with relatively large amounts of CDS contracts outstanding, and those with more limited access to financial markets. Moreover, the impact of CDS trading goes beyond the direct effects of bank lines of credit, which are generally less reliable sources of finance.
CURRENCY RISK AND PRICING KERNEL VOLATILITY, CDS AND SOVEREIGN BOND MARKET LIQUIDITY,
, 2014
"... This Dissertation is brought to you for free and open access by the Theses and Dissertations at Research Showcase @ CMU. It has been accepted for inclusion in Dissertations by an authorized administrator of Research Showcase @ CMU. For more information, please contact research- ..."
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This Dissertation is brought to you for free and open access by the Theses and Dissertations at Research Showcase @ CMU. It has been accepted for inclusion in Dissertations by an authorized administrator of Research Showcase @ CMU. For more information, please contact research-
Credit Default Swaps and Corporate Cash Holdings
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Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. www.econstor.eu
A Service of zbw Internal Governance and Creditor Governance: Evidence from Credit Default Swaps Second Draft
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Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The responsibility for discussion papers lies solely with the individual authors. The views expressed herein do not necessarily represent those of the IWH. The papers represent preliminary work and are circulated to encourage discussion with the authors. Citation of the discussion papers should account for their provisional character; a revised version may be available directly from the authors. Terms of use: Documents in
Evaluating applicants' credit capability for banking facilities by qualitative and operational indicators
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Credit Default Swaps, Exacting Creditors and Corporate Liquidity Management * Credit Default Swaps, Exacting Creditors and Corporate Liquidity Management
"... ABSTRACT We investigate the liquidity management of firms following the inception of credit default swaps (CDS) markets on firms' debt, which allows hedging and speculative trading on the borrowing firms' credit risk by creditors and other parties. We find that reference firms hold more c ..."
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ABSTRACT We investigate the liquidity management of firms following the inception of credit default swaps (CDS) markets on firms' debt, which allows hedging and speculative trading on the borrowing firms' credit risk by creditors and other parties. We find that reference firms hold more cash after CDS trading begins on their debt. Increased cash holdings is more pronounced for CDS firms that do not pay dividends and have a higher marginal value of liquidity. For CDS firms with higher cash flow volatility, these increased cash holdings do not entail higher leverage. Overall, our findings are consistent with the view that CDS-referenced firms adopt more conservative liquidity policies to avoid negotiations with more exacting creditors. JEL classification: G32.
