A Theory of Liquidity Spillover between Bond and CDS Markets

• 成果类型: Article
• 署名作者: Sambalaibat, Batchimeg
• 署名单位: Princeton University
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhab094
• 发表日期: 2022
• 页码: 2525
• 关键词: Credit default swaps; SOVEREIGN CDS; RISK; search; valuation; spreads

摘要

I build a search model of bond and credit default swap (CDS) markets with endogenous investor participation and show that shorting bonds through CDS increases the liquidity and price of bonds. By allowing investors to trade the credit risk of bonds without trading the bonds, CDS introduction expands the set of feasible trades and attracts investors into the credit market. Because search is nondirected within the credit market, new investors also trade bonds and consequently increase their price and liquidity. My results suggest that naked CDS bans increased sovereigns' borrowing costs and thereby exacerbated the 2010-2012 European debt crisis.