The Anatomy of the CDS Market
Coauthor(s): Adam Zawadowski.
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What is the economic role of the market for credit default swaps (CDSs)? Using novel position and trading data for single-name corporate CDSs, we provide evidence that CDS markets emerge as "alternative trading venues" for hedging and speculation: CDS markets are larger and more likely to exist for firms with bonds that are fragmented into many separate issues — suggesting a standardization and liquidity role of CDS markets. Whereas hedging motives are associated with comparable trading volume in the bond and CDS markets, speculative trading volume concentrates in the CDS. Crossmarket arbitrage links the CDS and the bond market via the basis trade.
Oehmke, Martin, and Adam Zawadowski. "The Anatomy of the CDS Market." Columbia Business School, September 2014.