Did CDS Trading Improve the Market for Corporate Bonds?

Das, Sanjiv Ranjan; Kalimipalli, Madhu; Nayak, Subhankar

doi:10.2139/ssrn.1782298

Cited by 47 publications

(65 citation statements)

References 62 publications

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“…They show that arbitrageurs introduce new risks into the corporate bond market, which was dominated by passive investors before the existence of CDS. Using an extensive sample of CDS and bond trades over 2002-2008, Das, Kalimipalli, and Nayak (2011 find that the trading of CDS was largely detrimental, making bond markets less efficient. In a systematic and informative study, Boehmer, Chava, and Tookes (2012) provide evidence that the trading in different derivative markets affects the equity market in different ways.…”

Section: The Effect Of Derivatives Tradingmentioning

confidence: 99%

Speculation and Hedging in Segmented Markets

Goldstein

Yang

2012

SSRN Journal

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We analyze a model in which traders have different trading opportunities and learn information from prices. The difference in trading opportunities implies that different traders may have different trading motives when trading in the same market-some trade for speculation and others for hedging-and thus they may respond to the same information in opposite directions. This implies that adding more informed traders may reduce price informativeness and therefore provides a source for learning complementarities leading to multiple equilibria and price jumps. Our model is relevant to various realistic settings and helps to understand a variety of modern financial markets. (JEL G14, G12, G11, D82)

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Section: The Effect Of Derivatives Tradingmentioning

confidence: 99%

Speculation and Hedging in Segmented Markets

Goldstein

Yang

2012

SSRN Journal

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“…Boehmer, Chava, and Tookes (2013) find that CDS generally have a negative impact on equity market quality measured in terms of stock liquidity and stock price efficiency. Das, Kalimipalli, and Nayak (2014) also argue that CDS are largely detrimental to the corporate bond market, which has become less efficient and has not experienced a reduction in pricing errors or an improvement in liquidity. 6 Our finding that price adjustments are stronger in the corporate bond market than in the CDS market, however, suggests that the presence of CDS may improve the pricing efficiency of the corporate bond market.…”

Section: Introductionmentioning

confidence: 99%

CDS-bond basis and bond return predictability

Kim

Zhang

2016

Journal of Empirical Finance

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We examine the predictive power of the CDS-bond basis for future corporate bond returns. We find that residual basis, the part of the CDS-bond basis that cannot be explained by a wide range of market frictions such as counterparty risk, funding risk, and liquidity risk, strongly negatively predicts excess returns. Controlling for systematic risk factors, including credit risk and liquidity risk, we find that a bond portfolio formed on the residual basis generates a significant abnormal bond return of 1.79% at the 20-day horizon. The abnormal returns due to the residual basis reflect mispricing rather than missing systematic risk factors. These results are robust to different horizons and sample periods and to the various characteristics of bonds. Overall, our results imply a beneficial role of CDS in the bond market as the existence of mispricing between CDS and bonds results in a subsequent price convergence in bonds.JEL Classification: G10, G12

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“…Overall, 2 Several studies analyze the e ect of CDS trading on the bond market. For example, Das et al (2014) find no evidence for an increase in bond market liquidity or a reduction in pricing errors. Chava et al (2012) show that credit ratings become less important when a market price for the risk of a company can be observed.…”

Section: Theoretical Frameworkmentioning

confidence: 86%

The Impact of Credit Default Swap Trading on Loan Syndication *

Streitz

2015

Review of Finance

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We analyze the impact of CDS trading on bank syndication activity. Theoretically, the e ect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower's debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.Keywords: Loan Sales, Credit Default Swaps, Syndicate Structure, Syndicated Loans JEL-Classification: G21, G32ú Daniel Streitz is from the Institute of Corporate Finance at Humboldt University Berlin. The author would like to thank Tim Adam, Tobias Berg, Valentin Burg, Sudipto Dasgupta, Hermann Elendner, Xavier Giroud, Laurenz Klipper, Augustin Landier, Christian Laux, Gustavo Manso, Martin Oehmke, Steven Ongena (the editor), Gordon Phillips, Tobias Scheinert, Sascha Ste en, Alex Stomper, Gunter Strobl, and an anonymous referee for helpful comments and suggestions. Some of the work on this paper was completed while the author was visiting USC Marshall School of Business. The author gratefully acknowledges financial support from the Deutsche Forschungsgemeinschaft through SFB 649 "Economic Risk" and SFB-TR15 "Governance and the E ciency of Economic Systems". Send correspondence to Daniel Streitz, Institute of Corporate Finance, Dorotheenstrasse 1, 10099 Berlin, Germany; E-mail: daniel.streitz@wiwi.hu-berlin.de. The Impact of Credit Default Swap Trading on Loan Syndicationú February 2, 2015 AbstractWe analyze the impact of CDS trading on bank syndication activity. Theoretically, the e ect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower's debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.

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Did CDS Trading Improve the Market for Corporate Bonds?

Cited by 47 publications

References 62 publications

Speculation and Hedging in Segmented Markets

Speculation and Hedging in Segmented Markets

CDS-bond basis and bond return predictability

The Impact of Credit Default Swap Trading on Loan Syndication *

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