Skip Navigation

The most recent version of this article [hhv047] was published on 2015-11-05

Synthetic or Real? The Equilibrium Effects of Credit Default Swaps on Bond Markets

  1. Martin Oehmke
  1. Columbia University
  1. Adam Zawadowski
  1. Boston University and Central European University
  1. Send correspondence to Martin Oehmke, Columbia Business School, 420 Uris Hall, 3022 Broadway, New York, NY 10027; telephone: 212-851-1804. Email: moehmke{at}columbia.edu.

Abstract

We provide a model of nonredundant credit default swaps (CDSs), building on the observation that CDSs have lower trading costs than bonds. CDS introduction involves a trade-off: it crowds out existing demand for the bond, but improves the bond allocation by allowing long-term investors to become levered basis traders and absorb more of the bond supply. We characterize conditions under which CDS introduction raises bond prices. The model predicts a negative CDS-bond basis, as well as turnover and price impact patterns that are consistent with empirical evidence. We also show that a ban on naked CDSs can raise borrowing costs.

JEL Codes:

JEL codes

ACCEPTED MANUSCRIPT

This Article

  1. Rev. Financ. Stud. doi: 10.1093/rfs/hhv047 First published online: August 27, 2015
  1. » AbstractFree
  2. Full Text (PDF)
  3. Supplementary Data
  4. All Versions of this Article:
    1. hhv047v1
    2. hhv047v2
    3. 28/12/3303 most recent

Classifications

Share

  1. Email this article

Current Issue

  1. December 2016 29 (12)
  1. Review of Financial Studies
  1. Alert me to new issues

Most

Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.