Using novel position and trading data for single-name corporate credit default swaps (CDSs), we provide evidence that CDS markets emerge as "alternative trading venues" that serve a standardization and liquidity role. CDS positions and trading volume are larger for firms with bonds that are fragmented into many separate issues and have heterogeneous contractual terms. Whereas hedging motives are associated with trading volume in the bond and CDS markets, speculative trading concentrates in the CDS. Cross-market arbitrage links the CDS and bond market via the basis trade, compressing the negative CDS-bond basis and reducing price impact in the bond market. * We would like to thank the DTCC for providing the data used in this research. For comments and suggestions, we are grateful to three anonymous referees, Viral Acharya,

In our empirical study we examine the dynamics of the price evolution of liquid stocks after experiencing a large intra-day price change, using data from the NYSE and the NASDAQ. We find a significant reversal for both intra-day price decreases and increases. Volatility, volume and, in the case of the NYSE, the bid-ask spread, which increase sharply at the event, stay significantly high days afterwards. The decay of the volatility follows a power law in accordance with the 'Omori law'. While on the NYSE the large widening of the bid-ask spread eliminates most of the profits that can be achieved by an outside investor, on the NASDAQ the bid-ask spread stays almost constant, yielding significant short-term profits. The results thus give an insight into the size and speed of the realization of an excess return for providing liquidity in a turbulent market.Liquid stocks, Extreme price changes, Market reaction,

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LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website. This document is the author's final accepted version of the journal article. There may be differences between this version and the published version. You are advised to consult the publisher's version if you wish to cite from it. Synthetic or Real?The Equilibrium Effects of Credit Default Swaps on Bond Markets Martin Oehmke Columbia University Adam ZawadowskiBoston University and Central European University AbstractWe provide a model of nonredundant credit default swaps (CDSs), building on the observation that CDSs have lower trading costs than bonds. CDS introduction involves a trade-off: it crowds out existing demand for the bond, but improves the bond allocation by allowing long-term investors to become levered basis traders and absorb more of the bond supply. We characterize conditions under which CDS introduction raises bond prices. The model predicts a negative CDS-bond basis, as well as turnover and price impact patterns that are consistent with empirical evidence. We also show that a ban on naked CDSs can raise borrowing costs. (JEL G10, G12, G13, G18)For helpful comments and suggestions, we thank two referees, Patrick Augustin, Jennie Bai, Snehal Banerjee, Patrick Bolton, Jaewon Choi, Willie Fuchs, Larry Glosten, Itay Goldstein, Arvind Krishnamurthy, Haitao Li, Xuewen Liu, Konstantin Milbradt, Uday Rajan, Martin Schneider, Suresh Sundaresan, Dimitri Vayanos, Andy Winton, and Haoxiang Zhu, as well as conference and seminar participants at Boston University, Brandeis University, BIS, Vienna GSF, Singapore Management University, Nanyang Technological University, National University of Singapore, HKUST, Humboldt Universität zu Berlin, Columbia University, Michigan State University, the 2013 Red Rock Conference, the 2014 AFA, Wharton, the Boston Fed, the 2014 SFS Cavalcade, LSE, the 2014 Banque de France Conference on OTC Markets, the 2014 WFA, ESSET Gerzensee, SITE, the ECB, Emory, the Third Wharton Liquidity Conference, University Credit default swap (CDS) markets have grown enormously over the past decade. However, although there is a relatively large literature on the pricing of CDSs, much less work has been done on the economic role of these markets. For example, in most pricing models, CDSs are redundant securities, such that the introduction of a CDS market has no effect on the underlying bond market.This irrelevancy feature makes a meaningful analysis of the economic role of CDS markets difficult.In this paper, we devel...