The Anatomy of the CDS Market

Martin Oehmke and Adam Zawadowski

The Review of Financial Studies, 2017, vol. 30, issue 1, 80-119

Abstract: Using novel position and trading data for single-name corporate credit default swaps (CDSs), we provide evidence that CDS markets emerge as “alternative trading venues” serving a standardization and liquidity role. CDS positions and trading volume are larger for firms with bonds fragmented into many separate issues and with heterogeneous contractual terms. Whereas hedging motives are associated with trading volume in the bond and CDS markets, speculative trading concentrates in the CDS. Cross-market arbitrage links the CDS and bond market via the basis trade, compressing the negative CDS-bond basis and reducing price impact in the bond market.Received September 24, 2014; accepted January 17, 2016 by Editor Andrew Karolyi.

JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 2017
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