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Financial oligopolies and parallel exclusion in the credit default swap markets

Lawrence Kryzanowski, Stylianos Perrakis () and Rui Zhong

Journal of Financial Markets, 2021, vol. 56, issue C

Abstract: Motivated by a recent antitrust case in the credit default swap (CDS) market defined as “parallel exclusion”, we formulate an oligopoly model of simultaneous trading by dealers in the CDS and loan CDS (LCDS) markets. We show that in equilibrium it is optimal for incumbent dealers to take suitably designed opposite positions in the two markets. Limiting information to incumbents constitutes a barrier to entry and preserves the intermarket arbitrage profits even in the absence of collusion. We use all mature contract pairs and document very large and virtually riskless profits. Extensive empirical tests support our model over competing explanations.

Keywords: Oligopolies; Market structure; Barriers to entry; (Loan) credit default swaps; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G01 G13 G14 G3 L13 L14 L16 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.finmar.2020.100606

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