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Dealing with dealers: Sovereign CDS comovements

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  • Antón, Miguel
  • Mayordomo, Sergio
  • Rodríguez‐Moreno, María

Abstract

We show that sovereign CDS that have common dealers tend to be more correlated, especially when the dealers display similar quoting activity in those contracts over time. This commonality in dealers’ activity is a powerful driver of CDS return comovements, over and above fundamental similarities between countries, including default, liquidity, and macro factors. We posit that the mechanism causing the excess correlation is the buying pressure faced by CDS dealers for credit enhancements and regulatory capital reliefs. An instrumental variable analysis helps alleviate the endogeneity concerns in our analysis.

Suggested Citation

  • Antón, Miguel & Mayordomo, Sergio & Rodríguez‐Moreno, María, 2018. "Dealing with dealers: Sovereign CDS comovements," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 96-112.
    • Handle: RePEc:eee:jbfina:v:90:y:2018:i:c:p:96-112
    DOI: 10.1016/j.jbankfin.2018.03.004
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    Cited by:

    1. Sven Klingler & David Lando, 2018. "Safe Haven CDS Premiums," The Review of Financial Studies, Society for Financial Studies, vol. 31(5), pages 1856-1895.
    2. Aramonte, Sirio & Szerszeń, Paweł J., 2020. "Cross-market liquidity and dealer profitability: Evidence from the bond and CDS markets," Journal of Financial Markets, Elsevier, vol. 51(C).
    3. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    4. Augustin, Patrick & Sokolovski, Valeri & Subrahmanyam, Marti G., 2016. "Why do investors buy sovereign default insurance?," CFS Working Paper Series 540, Center for Financial Studies (CFS).
    5. Augustin, Patrick & Sokolovski, Valeri & Subrahmanyam, Marti G. & Tomio, Davide, 2022. "How sovereign is sovereign credit risk? Global prices, local quantities," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 92-111.

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    More about this item

    Keywords

    Sovereign CDS; Comovements; Commonalities; Dealers;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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