Abstract
We argue that Credit Default Swap (CDS) premia for safe-haven sovereigns, like Germany and the United States, are driven to a large extent by regulatory requirements under which derivatives dealing banks have an incentive to buy CDS to hedge counterparty credit risk of their counterparties. We explain the mechanics of the regulatory requirements and develop a model in which derivatives dealers, who have a derivatives exposure with sovereigns, need CDS for capital relief. End users without exposure to the sovereigns sell the CDS and require a positive premium equivalent to the capital requirement. The model's predictions are confirmed using data on several sovereigns.
| Original language | English |
|---|---|
| Publication date | 2016 |
| Number of pages | 47 |
| Publication status | Published - 2016 |
| Event | The 76th Annual Meeting of American Finance Association. AFA 2016 - San Francisco, CA, United States Duration: 3 Jan 2016 → 5 Jan 2016 Conference number: 76 http://www.afajof.org/details/page/8357781/2016-Meeting-Program.html |
Conference
| Conference | The 76th Annual Meeting of American Finance Association. AFA 2016 |
|---|---|
| Number | 76 |
| Country/Territory | United States |
| City | San Francisco, CA |
| Period | 03/01/2016 → 05/01/2016 |
| Internet address |
Keywords
- CDS premia
- Capital charges
- Government bonds