The Network Structure of the CDS Market and its Determinants

46 Pages Posted: 12 Sep 2013

See all articles by Tuomas A. Peltonen

Tuomas A. Peltonen

European Central Bank (ECB)

Martin Scheicher

European Central Bank (ECB)

Guillaume Vuillemey

HEC Paris - Finance Department

Date Written: August 2013

Abstract

This paper analyzes the network structure of the credit default swap (CDS) market, using a unique sample of counter-parties’ bilateral notional exposures to CDS on 642 sovereign and financial reference entities. We study the network structure, similarly to the literature on interbank and payment systems, by computing a variety of network metrics at the aggregated level and for several sub-networks. At a reference entity level, we analyze the determinants of some key network properties for large reference entities. Our main results, obtained on a sub-sample of 191 reference entities, are the following. First, the CDS network shows topological similarities with the interbank network, as we document a “small world” structure and a scale-free degree distribution for the CDS market. Second, there is considerable heterogeneity in the network structures across reference entities. In particular, the outstanding debt volume and its structure (maturity, collateralization), the riskiness, the type (sovereign/financial) and the location (European/non-European) of reference entities significantly influence the size, the activity and the concentration of the CDS exposure network. For instance, the network on a high-volatility reference entity is typically more active, larger in size and less concentrated.

Keywords: Credit Default Swap (CDS), financial networks, network topology, network determinants

JEL Classification: G15

Suggested Citation

Peltonen, Tuomas A. and Scheicher, Martin and Vuillemey, Guillaume, The Network Structure of the CDS Market and its Determinants (August 2013). ECB Working Paper No. 1583, Available at SSRN: https://ssrn.com/abstract=2311264

Tuomas A. Peltonen (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Martin Scheicher

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 (Phone)
+49 69 1344 7949 (Fax)

HOME PAGE: http://www.ecb.europa.eu

Guillaume Vuillemey

HEC Paris - Finance Department ( email )

1 rue de la Libération
Paris, Not Applicable 78351
France
+33660204275 (Phone)

HOME PAGE: http://sites.google.com/site/guillaumevuillemey/home

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
93
Abstract Views
610
rank
329,434
PlumX Metrics