Dealing with dealers: sovereign CDS comovements
Miguel Antón (),
Sergio Mayordomo () and
Maria Rodriguez-Moreno ()
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Miguel Antón: IESE BUSINESS SCHOOL
No 1723, Working Papers from Banco de España, Working Papers Homepage
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 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 confirms that our findings are indeed rooted in a causal relationship.
Keywords: sovereign CDS; comovements; commonalities; dealers (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 43 pages
New Economics Papers: this item is included in nep-ban and nep-fmk
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Journal Article: Dealing with dealers: Sovereign CDS comovements (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1723
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