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Funding Liquidity and CDS-Bond Basis: Evidence from the CDS Big Bang

In: Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes

Author

Listed:
  • Xinjie Wang
  • Zhaodong (Ken) Zhong

Abstract

The CDS Big Bang increased the upfront funding requirements for trading CDS contracts, especially for those with credit spreads further away from 100 and 500 basis points. Exploiting this regulatory change, we document that a higher funding requirement reduces market liquidity and increases the absolute value of the CDS-bond basis. The funding effects are stronger for smaller reference entities. Our findings highlight the importance of the tradeoff between standardization and the funding cost of upfront payments.

Suggested Citation

  • Xinjie Wang & Zhaodong (Ken) Zhong, 2024. "Funding Liquidity and CDS-Bond Basis: Evidence from the CDS Big Bang," World Scientific Book Chapters, in: Cheng Few Lee & Alice C Lee & John C Lee (ed.), Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes, chapter 74, pages 2309-2331, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789811269943_0074
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    Keywords

    Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G1 - Financial Economics - - General Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • G3 - Financial Economics - - Corporate Finance and Governance

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