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The impact of central clearing on the market for single-name credit default swaps

Mohamed-Ali Akari (), Ramzi Ben-Abdallah (), Michèle Breton () and Georges Dionne
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Mohamed-Ali Akari: HEC Montreal, Department of Decision Sciences
Ramzi Ben-Abdallah: UQAM School of Management
Michèle Breton: HEC Montreal, Department of Decision Sciences

No 18-1, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: In this paper, we examine the impact of the voluntary central clearing scheme on the CDS market for North American firms during the period spanning 2009 to 2015. In order to address the endogeneity problem arising from the fact that central clearing is not mandatory for single-name CDSs, we use a methodology that relies on propensity-score matching combined with generalized difference-in-differences. Our empirical findings show that initiating the central clearing results in an increase in CDS spreads, while there is no evidence of an associated improvement in CDS market liquidity and trading activity or of a deterioration in the default risk of the underlying bond. These results suggest that the increase in CDS spreads of centrally cleared entities can be mainly attributed to the reduction in CDS counterparty risk, and that the magnitude of this price increase (19 bps) could be used as an assessment of counterparty risk in the non-cleared CDS market.

Keywords: Credit default swaps; central clearing; counterparty risk; liquidity; trading activity; difference-in-differences. (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 G18 G28 (search for similar items in EconPapers)
Date: 2018-04-30, Revised 2019-01-25
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