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Sovereign CDS Market: The Role of Dealers in Credit Events

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  • Lawrence Jia
  • Bruno Sultanum
  • Elliot Tobin

Abstract

In this paper, we study the credit default swaps (CDS) position of the main dealers in the CDS market close to credit events of sovereign countries. We focus on the credit events of three countries that have faced significant financial distress in the past decade: Argentina, Venezuela, and Ukraine. After introducing the historical background of each country, we find that CDS dealers, defined as the top ten traders of CDS in their respective countries, tend to sell sovereign CDS (hold more negative or less positive positions) when yields/CDS spreads go up. This finding suggests that dealers perform the role of liquidity providers in times of financial distress and take the credit risk that smaller traders want to unload into the market.

Suggested Citation

  • Lawrence Jia & Bruno Sultanum & Elliot Tobin, 2020. "Sovereign CDS Market: The Role of Dealers in Credit Events," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 3, pages 97-113.
    • Handle: RePEc:fip:fedreq:92733
    DOI: 10.21144/eq1060301
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    References listed on IDEAS

    as
    1. Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany.
    2. Batchimeg Sambalaibat, 2012. "Credit Default Swaps and Sovereign Debt with Moral Hazard and Debt Renegotiation," 2012 Meeting Papers 1093, Society for Economic Dynamics.
    3. Virginie Coudert & Mathieu Gex, 2010. "The Credit Default Swap Market and the Settlement of Large Defaults," International Economics, CEPII research center, issue 123, pages 91-120.
    4. Salomao, Juliana, 2017. "Sovereign debt renegotiation and credit default swaps," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 50-63.
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