Funding Liquidity and CDS-Bond Basis: Evidence from the CDS Big Bang

Xinjie Wang and Zhaodong Zhong

Chapter 74 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 2309-2331 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The CDS Big Bang increased the upfront funding requirements for trading CDS contracts, especially for those with credit spreads further away from 100 and 500 basis points. Exploiting this regulatory change, we document that a higher funding requirement reduces market liquidity and increases the absolute value of the CDS-bond basis. The funding effects are stronger for smaller reference entities. Our findings highlight the importance of the tradeoff between standardization and the funding cost of upfront payments.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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