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Dealing with dealers: Sovereign CDS comovements

Miguel Antón, Sergio Mayordomo () and Rodríguez‐Moreno, María
Authors registered in the RePEc Author Service: Maria Rodriguez-Moreno ()

Journal of Banking & Finance, 2018, vol. 90, issue C, 96-112

Abstract: We show that sovereign CDS that have common dealers tend to be more correlated, especially when the dealers display similar quoting activity in those contracts over time. This commonality in dealers’ activity is a powerful driver of CDS return comovements, over and above fundamental similarities between countries, including default, liquidity, and macro factors. We posit that the mechanism causing the excess correlation is the buying pressure faced by CDS dealers for credit enhancements and regulatory capital reliefs. An instrumental variable analysis helps alleviate the endogeneity concerns in our analysis.

Keywords: Sovereign CDS; Comovements; Commonalities; Dealers (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2018
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