Synthetic or real? The equilibrium effects of credit default swaps on bond markets

• Autores: Martin Oehmke, Adam Zawadowski
• Localización: Review of Financial Studies, ISSN-e 1465-7368, Vol. 28, Nº. 12, 2015, págs. 3303-3337
• Idioma: inglés
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• Resumen

  • 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