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Financial oligopolies and parallel exclusion in the credit default swap markets

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  • Kryzanowski, Lawrence
  • Perrakis, Stylianos
  • Zhong, Rui

Abstract

Motivated by a recent antitrust case in the credit default swap (CDS) market defined as “parallel exclusion”, we formulate an oligopoly model of simultaneous trading by dealers in the CDS and loan CDS (LCDS) markets. We show that in equilibrium it is optimal for incumbent dealers to take suitably designed opposite positions in the two markets. Limiting information to incumbents constitutes a barrier to entry and preserves the intermarket arbitrage profits even in the absence of collusion. We use all mature contract pairs and document very large and virtually riskless profits. Extensive empirical tests support our model over competing explanations.

Suggested Citation

  • Kryzanowski, Lawrence & Perrakis, Stylianos & Zhong, Rui, 2021. "Financial oligopolies and parallel exclusion in the credit default swap markets," Journal of Financial Markets, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:finmar:v:56:y:2021:i:c:s1386418120300756
    DOI: 10.1016/j.finmar.2020.100606
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    More about this item

    Keywords

    Oligopolies; Market structure; Barriers to entry; (Loan) credit default swaps; Limits to arbitrage;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • G01 - Financial Economics - - General - - - Financial Crises
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G3 - Financial Economics - - Corporate Finance and Governance

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