Credit default swaps and corporate bond trading

Robert Czech

No 810, Bank of England working papers from Bank of England

Abstract: Using regulatory data on CDS holdings and corporate bond transactions, I provide evidence for a liquidity spillover effect from CDS to bond markets. Bond trading volumes are larger for investors with CDS positions written on the debt issuer, in particular around rating downgrades. I use a quasi-natural experiment to validate these findings. I also provide causal evidence that CDS mark-to-market losses lead to fire sales in the bond market. I instrument for the prevalence of mark-to-market losses with the fraction of non-centrally cleared CDS contracts of an individual counterparty. The monthly corporate bond sell volumes of investors exposed to large mark-to-market losses are three times higher than those of unexposed counterparties. Returns decrease by more than 100 bps for bonds sold by exposed investors, compared to same-issuer bonds sold by unexposed investors. My findings underline the risk of a liquidity spiral in the credit market.

Keywords: Corporate bonds; credit default swaps; trading volume; regulation; central clearing; liquidity spiral; financial stability (search for similar items in EconPapers)
JEL-codes: G11 G12 G18 G20 G28 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2019-07-12
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Credit default swaps and corporate bond trading (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0810

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