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The Anatomy of the CDS Market

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  • Martin Oehmke
  • Adam Zawadowski

Abstract

Using novel position and trading data for single-name corporate credit default swaps (CDSs), we provide evidence that CDS markets emerge as “alternative trading venues” serving a standardization and liquidity role. CDS positions and trading volume are larger for firms with bonds fragmented into many separate issues and with heterogeneous contractual terms. Whereas hedging motives are associated with trading volume in the bond and CDS markets, speculative trading concentrates in the CDS. Cross-market arbitrage links the CDS and bond market via the basis trade, compressing the negative CDS-bond basis and reducing price impact in the bond market.Received September 24, 2014; accepted January 17, 2016 by Editor Andrew Karolyi.

Suggested Citation

  • Martin Oehmke & Adam Zawadowski, 2017. "The Anatomy of the CDS Market," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 80-119.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:1:p:80-119.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw068
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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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