The Impact of CDS Trading on the Bond Market: Evidence from Asia
42 Pages Posted: 4 Aug 2010 Last revised: 17 Nov 2010
Date Written: May 30, 2010
This paper investigates the impact of CDS trading on the development of the bond market in Asia. In general, CDS trading has lowered the cost of issuing bonds and enhanced the liquidity in the bond market. The positive impact is stronger for smaller firms, non-financial firms and those firms with higher liquidity in the CDS market. These empirical findings support the diversification and information hypotheses in the literature. Nevertheless, CDS trading has also introduced a new source of risk. There is strong evidence that, at the peak of the recent global financial crisis, those firms included in CDS indices faced higher bond yield spreads than those not included.
Keywords: Credit default swaps, bond spreads, bond liquidity, CDS index, Asia
JEL Classification: G12, G32
Suggested Citation: Suggested Citation