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CDS market structure and bond spreads

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  • Dr. Andrada Bilan
  • Yalin Gündüz

Abstract

We study the response of bond spreads to a liquidity supply shock in the credit default swap (CDS) market. Our identification strategy exploits the exogenous exit of a large dealer from the single-name CDS market as well as granular data on CDS transactions and bond portfolio holdings of German investors. Following the shock, CDS market liquidity declines and bond spreads increase, especially for the reference firms intermediated by the dealer. Individual portfolio data indicate hedging motives as a mechanism: as CDS insurance on their bond holdings becomes costlier, investors offload the bonds. Our results therefore show that frictions in derivative markets affect the underlying securities, which can raise firms' cost of capital.

Suggested Citation

  • Dr. Andrada Bilan & Yalin Gündüz, 2022. "CDS market structure and bond spreads," Working Papers 2022-09, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2022-09
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    More about this item

    Keywords

    Credit default swaps; dealer markets; bonds markets; credit risk; Depository Trust and Clearing Corporation (DTCC);
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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