IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v35y2022i5p2525-2569..html
   My bibliography  Save this article

A Theory of Liquidity Spillover between Bond and CDS Markets

Author

Listed:
  • Batchimeg Sambalaibat

Abstract

I build a search model of bond and credit default swap (CDS) markets with endogenous investor participation and show that shorting bonds through CDS increases the liquidity and price of bonds. By allowing investors to trade the credit risk of bonds without trading the bonds, CDS introduction expands the set of feasible trades and attracts investors into the credit market. Because search is nondirected within the credit market, new investors also trade bonds and consequently increase their price and liquidity. My results suggest that naked CDS bans increased sovereigns’ borrowing costs and thereby exacerbated the 2010–2012 European debt crisis.

Suggested Citation

  • Batchimeg Sambalaibat, 2022. "A Theory of Liquidity Spillover between Bond and CDS Markets," The Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2525-2569.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:5:p:2525-2569.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhab094
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Haddou, Samira, 2024. "Determinants of CDS in core and peripheral European countries: A comparative study during crisis and calm periods," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).
    2. Chaumont, Gaston & Gordon, Grey & Sultanum, Bruno & Tobin, Elliot, 2024. "Sovereign debt and credit default swaps," Journal of International Economics, Elsevier, vol. 150(C).
    3. Maximilian Jager & Frederick Zadow, 2023. "Clear(ed) Decision: The Effect of Central Clearing on Firms Financing Decision," CRC TR 224 Discussion Paper Series crctr224_2023_445, University of Bonn and University of Mannheim, Germany.
    4. Weber, Matthias & Duffy, John & Schram, Arthur, 2024. "Regulation and the demand for credit default swaps in experimental bond markets," European Economic Review, Elsevier, vol. 165(C).

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G1 - Financial Economics - - General Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:35:y:2022:i:5:p:2525-2569.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sfsssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.