Credit default swaps and corporate bond trading

Robert Czech

Journal of Financial Intermediation, 2021, vol. 48, issue C

Abstract: Using regulatory data on CDS holdings and corporate bond transactions, I provide evidence for a liquidity spillover effect from CDS to bond markets. Bond trading volumes are 70% larger for investors with CDS positions written on the debt issuer. Moreover, higher CDS trading activity substantially improves the liquidity of the underlying bonds, particularly around rating downgrades. Additional analyses reveal that the spillover effect is partly driven by naked CDS positions, highlighting one of the adverse consequences of naked CDS bans for bond markets. The results suggest that the presence of an accessible CDS market enhances the liquidity of the underlying bond market.

Keywords: Corporate bonds; Credit default swaps; Liquidity; Trading volumes; Regulation (search for similar items in EconPapers)
JEL-codes: G11 G12 G18 G20 G28 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Credit default swaps and corporate bond trading (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:48:y:2021:i:c:s1042957321000334

DOI: 10.1016/j.jfi.2021.100932

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