CDS and Sovereign Bond Market Liquidity

Sambalaibat, Batchimeg

doi:10.2139/ssrn.2404512

Cited by 8 publications

(6 citation statements)

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“…Interestingly, the authors also find that the bid-ask spreads of speculative-grade sovereign reference entities are wider than those of similarly rated corporate reference entities, while no such gap exists for investment-grade issuers. The last result is corroborated in a study by Sambalaibat (2013), who documents that percentage bid-ask spreads in the sovereign CDS markets are about ten times larger than those in the underlying government bond market. Badaoui et al (2013) decompose sovereign CDS spreads and find a large liquidity risk component that represents about 44.32% of the entire spread in nine emerging countries: The size of the liquidity premium is not much smaller than the credit risk component.…”

Section: Liquidity In the Sovereign Cds Marketmentioning

confidence: 58%

“…72 It is worthwhile to note that while most of the papers in this literature assume that the number of traders is fixed, Sambalaibat (2013) develops a search based model for sovereign CDS where the number of traders is not fixed, and new investors may enter the market because of the availability of hedges. effort level, which is unobservable, but can be inferred from the outcome of the investment project.…”

Section: On This Topicmentioning

confidence: 99%

“…Their conclusions are based on the findings that after the initiation date of sovereign CDS trading, public bonds become more informationally efficient, especially for highyield countries, and bond spreads decrease on average by 60 bps, with stronger effects for less creditworthy governments. Sambalaibat (2013) studies how the CDS market affects the liquidity of the sovereign bond market in the context of a dynamic OTC search model with search frictions and endogenous entry of broker-dealers. Her model predicts that investors will migrate to the bond market if they are temporarily shut out of the CDS market, but that they will leave altogether in case they are permanently restricted from trading in the CDS market.…”

Section: The Impact Of Sovereign Cds On Public Bondsmentioning

confidence: 99%

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Credit Default Swaps: A Survey

et al. 2014

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Credit default swaps (CDS) have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly after the credit crisis of 2008-2009 and the European sovereign crisis of 2010-2012. We review the extant literature on CDS that has accumulated over the past two decades. We divide our survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles as well as from that of structural and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the related bond and equity markets, with an emphasis on the closely related concepts of market efficiency, price discovery, information flow and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market, which leads to a discussion on capital structure arbitrage. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and both external and internal corporate governance. The sixth section summarizes the literature that takes into account how CDS may impact the incentives of the various agents in the economy and the associated impact on the pricing of the contracts. In particular, we examine how CDS may alter the debtor-creditor relationship. Section seven reviews the growing literature on sovereign CDS and highlights the major conceptual and contractual differences between the sovereign and corporate CDS markets. In section eight, we discuss CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. We close with our suggestions for promising future research directions on CDS contracts and markets.

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Section: Liquidity In the Sovereign Cds Marketmentioning

confidence: 58%

Section: On This Topicmentioning

confidence: 99%

Section: The Impact Of Sovereign Cds On Public Bondsmentioning

confidence: 99%

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Credit Default Swaps: A Survey

et al. 2014

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“…4 Naked CDS buyers attract a new set of investors who act as their counterparty, but due to search frictions in the CDS market, these new entrants also trade in the bond market as bond buyers. Sambalaibat (2013) points to evidence of decreases in sovereign bond liquidity associated with the EU ban of sovereign CDS contracts in 2011. In a separate paper, Sambalaibat (2012) argues that CDS can serve as collateral and support more sovereign borrowing.…”

Section: Hypotheses and Related Literaturementioning

confidence: 99%

“…In this context, CDS contracts may encourage participation by a larger segment of investors with heterogeneous risk preferences, resulting in a more certain and liquid sovereign bond market. For example, Sambalaibat (2013) builds a search theoretical model and finds that naked CDS trading improves bond liquidity. 4 Naked CDS buyers attract a new set of investors who act as their counterparty, but due to search frictions in the CDS market, these new entrants also trade in the bond market as bond buyers.…”

Section: Hypotheses and Related Literaturementioning

confidence: 99%