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The economic impact of credit default swap on credit markets
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Kim, Gi Hyun, Li, Haitao and Zhang, Weina (2012) The economic impact of credit default swap on credit markets. Working Paper. University of Warwick, Coventry, UK: Working paper . (Unpublished)
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Text (Working paper)
WRAP_Kim_KLZ for JFE Sept 2012.pdf - Other Download (1008Kb) | Preview |
Abstract
This study conducts a comprehensive analysis of the economic benefits and costs of credit default swap (CDS) in credit markets since its inception. Consistent with its role of insuring credit risk, the introduction of CDS reduces illiquidity and liquidity risk more for speculative grade bonds with high credit risk than investment grade ones. More importantly, CDS significantly improves the price convergence between investment grade bonds and CDS spreads through a popular trading strategy—CDS-bond basis arbitrage in normal period. In the recent crisis, however, CDS fails to reduce the prolonged price divergence between the two markets plausibly due to the lack of arbitrage. Overall, the economic impact of CDS is dependent on the prevailing trading strategies in the credit markets.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Financial crises, Global Financial Crisis, 2008-2009, Credit control , Credit, Credit bureaus, Corporate bonds, Price regulation, Liquidity (Economics), Economics -- Mathematical models | ||||
Publisher: | Working paper | ||||
Place of Publication: | University of Warwick, Coventry, UK | ||||
Official Date: | September 2012 | ||||
Dates: |
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Status: | Peer Reviewed | ||||
Publication Status: | Unpublished | ||||
Access rights to Published version: | Open Access (Creative Commons) | ||||
Funder: | Singapore. Ministry of Education | ||||
Grant number: | R315000074112/133 | ||||
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