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Safe Haven CDS Premiums

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  • Sven Klingler
  • David Lando

Abstract

Credit default swaps can be used to lower the capital requirements of dealer banks entering into uncollateralized derivatives positions with sovereigns. We show in a model that the regulatory incentive to obtain capital relief makes CDS contracts valuable to dealer banks and empirically that, consistent with the use of CDS for regulatory purposes, there is a disconnect between changes in bond yield spreads and in CDS premiums, especially for safe sovereigns. Additional empirical tests related to the volume of contracts outstanding, effects of regulatory proxies, and the corporate bond and CDS markets support that CDS contracts are used for capital relief. Received September 28, 2016; editorial decision January 26, 2018 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Suggested Citation

  • Sven Klingler & David Lando, 2018. "Safe Haven CDS Premiums," The Review of Financial Studies, Society for Financial Studies, vol. 31(5), pages 1856-1895.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:5:p:1856-1895.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy021
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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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