Dealing with Dealers: Sovereign CDS Comovements

57 Pages Posted: 8 Dec 2013 Last revised: 5 Jul 2017

See all articles by Miguel Anton

Miguel Anton

University of Navarra, IESE Business School

Sergio Mayordomo

Banco de España

Maria Rodriguez-Moreno

Banco de España

Multiple version iconThere are 2 versions of this paper

Date Written: June 2017

Abstract

We show that sovereign CDS that have common dealers tend to be more correlated, especially when the dealers display similar quoting activity in those contracts over time. This commonality in dealers’ activity is a powerful driver of CDS comovements, over and above fundamental similarities between countries, including default, liquidity, and macro factors. We posit that the mechanism causing the excess correlation is the buying pressure faced by CDS dealers for credit enhancements and regulatory capital reliefs. An instrumental variable analysis confirms that our findings are indeed rooted in a causal relationship.

Keywords: Sovereign CDS, comovements, commonalities, dealers

JEL Classification: G12, G14

Suggested Citation

Anton, Miguel and Mayordomo, Sergio and Rodriguez-Moreno, Maria, Dealing with Dealers: Sovereign CDS Comovements (June 2017). IESE Business School Working Paper No. WP-1090-E, Available at SSRN: https://ssrn.com/abstract=2364182 or http://dx.doi.org/10.2139/ssrn.2364182

Miguel Anton

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Sergio Mayordomo (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Maria Rodriguez-Moreno

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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