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Limited Investment Capital and Credit Spreads

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  • EMIL N. SIRIWARDANE

Abstract

Using proprietary credit default swap (CDS) data, I investigate how capital shocks at protection sellers impact pricing in the CDS market. Seller capital shocks—measured as CDS portfolio margin payments—account for 12% of the time‐series variation in weekly spread changes, a significant amount given that standard credit factors account for 18% during my sample. In addition, seller shocks possess information for spreads that is independent of institution‐wide measures of constraints. These findings imply a high degree of market segmentation, and suggest that frictions within specialized financial institutions prevent capital from flowing into the market at shorter horizons.

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  • Emil N. Siriwardane, 2019. "Limited Investment Capital and Credit Spreads," Journal of Finance, American Finance Association, vol. 74(5), pages 2303-2347, October.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:5:p:2303-2347
    DOI: 10.1111/jofi.12777
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