Dynamic Risk Management and Asset Comovement

Søren Bundgaard Brøgger*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review


When dealers’ hedging demand in one market depends on movements in another market it can drive a correlation between returns in the two markets. I show that changes in dealers’ demand for CDS protection for the purpose of counterparty risk management induce a non-fundamental correlation between credit and currency markets. The effects are economically significant. For example, I show that counterparty risk hedging associated with SoftBank’s currency swap portfolio substantially lowers the correlation between SoftBank’s CDS spread and the USD/JPY exchange rate and accounts for around 25% of the weekly volatility of CDS returns.
Original languageEnglish
JournalJournal of Empirical Finance
Issue number44
Pages (from-to)60-77
Number of pages18
Publication statusPublished - Jun 2022

Bibliographical note

Published online: 31 January 2022.


  • Derivatives
  • Risk management
  • Counterparty risk
  • Credit default swaps
  • Credit valuation adjustments

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