Trading Credit Default Swaps via Interdealer Brokers

Gündüz, Yalın; Lüdecke, Torsten; Uhrig‐Homburg, Marliese

doi:10.1007/s10693-007-0012-5

Cited by 15 publications

(4 citation statements)

References 41 publications

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“…For the CDS bid-ask spread changes, the adjusted 2 ranges from 8.7% (HeidelbergCement) to 33.5% (Commerzbank), with the median ̅ 2 equal to 23.6% (Zurich, TUI). These values are similar to those in Gündüz et al (2007) and Meng and ap Gwilym (2008) for the CDS bid-ask spread in levels. For the CDS mid-rate changes, the adjusted 2 ranges from 0.1% (Südzucker) to 30.1% (HeidelbergCement), with the median ̅ 2 equal to 8.4% (ThyssenKrupp).…”

Section: )-14) Dividend Yieldsupporting

confidence: 87%

“…Here the contribution of this paper is manifold. Previously, only Gündüz et al (2007) and Meng and ap Gwilym (2008) have analyzed the determinants of the CDS bid-ask level. This paper is therefore the first study to analyze which factors explain the changes in the CDS bid-ask spread and contributes to the existing literature on liquidity in financial markets in general and CDS markets in particular.…”

Section: Introductionmentioning

confidence: 99%

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Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets

Hertrich

2014

SSRN Journal

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During the recent financial crisis that erupted in mid-2007, credit default swap spreads increased by several hundred basis points, accompanied by a liquidity shortage in the U.S. financial sector. This period has both evidenced the importance that liquidity has for investors and underlined the need to understand the linkages between credit markets and liquidity. This paper sheds light on the dynamic interactions between credit and liquidity risk in the credit default swap market. Contrary to the common belief that illiquidity leads to a credit risk deterioration in financial markets, it is found that in a sample of German and Swiss companies, credit risk is more likely to be weakly endogenous for liquidity risk than vice versa. The results suggest that a negative credit shock typically leads to a subsequent liquidity shortage in the credit default swap market, in the spirit of, for instance, the liquidity spiral posited by Brunnermaier (2009), and extends our knowledge about how credit markets work, as it helps to explain the amplification mechanisms that severely aggravated the recent crisis and also indicates which macro-prudential policies would be suitable for preventing a similar financial crisis in the future.

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Section: )-14) Dividend Yieldsupporting

confidence: 87%

Section: Introductionmentioning

confidence: 99%

Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets

Hertrich

2014

SSRN Journal

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“…Panel A of Table 1 also shows that dealers act as protection buyers in 85% and as protection sellers for 89% of transactions in our dataset, compared to 89% (both as buyers and sellers) for the full TIW universe. The large dealer market share implies the existence of dealer market power (Gündüz et al, 2007) both for our dataset and the full TIW universe.…”

Section: The Dtcc Datasetmentioning

confidence: 94%

The liquidity premium in CDS transaction prices: Do frictions matter?

Gehde-Trapp

Gündüz

Nasev

2015

Journal of Banking & Finance

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“…The increasing sovereign indebtedness of eurozone countries has given rise to a serious possibility of contagion (Jorion and Zhang (2007), Longstaff (2010)). After the economic uncertainty in Greece, 2 For a detailed analysis of CDS contract features, see Gündüz et al (2007).…”

Section: Mentionmentioning

confidence: 99%

Sovereign Default Swap Market Efficiency and Country Risk in the Eurozone

Gündüz

Kaya²

2012

SSRN Journal

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93-7 (Printversion) Non-technical summaryCredit default swaps (CDSs) are financial derivatives that are designed to transfer credit risk between banks, hedge funds or asset managers in a simple way: The buyer of the CDS is insured by the seller against the default of the underlying sovereign entity. The insurance premium (or "the CDS spread") of these CDSs written on sovereign entities have been seen as an important indicator of the economic health of a given country. This paper uses CDS spread changes as a measure for the informational efficiency of the sovereign markets and CDS spread volatilities as a proxy for persistency of country risks. Specifically, we test whether the dependence of consecutive observations dies out slowly over time ("long memory"). We firstly show that there is no evidence of such behavior of CDS spread changes for any of the 10 eurozone countries in our sample. This indicates that, despite the financial crisis and uncertainty of financial markets, price discovery processes satisfy the minimum requirements for a weak form of market efficiency for sovereign CDSs, i.e. recent CDS spread changes cannot be predicted with past CDS spread changes. Second, there is strong evidence of long memory for volatility patterns of spread changes for 6 out of 10 countries. Specifically, we observe Greece, Portugal, Ireland, Italy, Spain, and Belgium to demonstrate such behavior. This shows that economies in the eurozone, which have been particularly affected by the financial and the sovereign debt crisis, are exposed to high uncertainty risk not only for a short period but over a persistent horizon. Third, we illustrate that CDS volatility is causal to CDS levels, indicating that uncertainty in CDS markets translates into higher risk premia for sovereign risk. Finally, we highlight the existence of a comovement of CDS spread changes for all countries, which is more explicit among peripheral economies. Our results have implications on selecting sovereign risk measures: Increased global risk aversion and the uncertainty about future sovereign debt market conditions have caused an increase in sovereign CDS volatility, which has been shown to be a meaningful measure of sovereign risk. Specifically, we apply semi-parametric and parametric methods to the sovereign CDSs of 10 eurozone countries to test the evidence of long memory behavior during the financial crisis. Our analysis reveals that there is no evidence of long memory for the spread changes, which indicates that the price discovery process functions efficiently for sovereign CDS markets even during the crisis. In contrast, both semi-parametric methods and the dual-parametric model imply persistent behavior in the volatility of changes for Greece, Portugal, Ireland, Italy, Spain, and Belgium addressing persistent sovereign uncertainty. We provide evidence of causality from volatility in CDS prices to sovereign risk premiums for these peripheral economies. Nicht-technische ZusammenfassungWe furthermore demonstrate the potential spillover effects of sp...

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Trading Credit Default Swaps via Interdealer Brokers

Abstract: Credit default swaps, market microstructure, over-the-counter trading, interdealer brokerage, liquidity, G15, G24,

Cited by 15 publications

References 41 publications

Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets

Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets

The liquidity premium in CDS transaction prices: Do frictions matter?

Sovereign Default Swap Market Efficiency and Country Risk in the Eurozone

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