Safe-haven CDS Premia

Sven Klingler, David Lando

Research output: Contribution to conferencePaperResearchpeer-review

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.
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.

Conference

ConferenceThe 76th Annual Meeting of American Finance Association. AFA 2016
Number76
CountryUnited States
CitySan Francisco, CA
Period03/01/201605/01/2016
Internet address

Keywords

  • CDS premia
  • Capital charges
  • Government bonds

Cite this

Klingler, S., & Lando, D. (2016). Safe-haven CDS Premia. Paper presented at The 76th Annual Meeting of American Finance Association. AFA 2016, San Francisco, CA, United States.
Klingler, Sven ; Lando, David. / Safe-haven CDS Premia. Paper presented at The 76th Annual Meeting of American Finance Association. AFA 2016, San Francisco, CA, United States.47 p.
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author = "Sven Klingler and David Lando",
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note = "null ; Conference date: 03-01-2016 Through 05-01-2016",
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Klingler, S & Lando, D 2016, 'Safe-haven CDS Premia' Paper presented at, San Francisco, CA, United States, 03/01/2016 - 05/01/2016, .

Safe-haven CDS Premia. / Klingler, Sven; Lando, David.

2016. Paper presented at The 76th Annual Meeting of American Finance Association. AFA 2016, San Francisco, CA, United States.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Safe-haven CDS Premia

AU - Klingler,Sven

AU - Lando,David

PY - 2016

Y1 - 2016

N2 - 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.

AB - 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.

KW - CDS premia

KW - Capital charges

KW - Government bonds

KW - CDS premia

KW - Capital charges

KW - Government bonds

M3 - Paper

ER -

Klingler S, Lando D. Safe-haven CDS Premia. 2016. Paper presented at The 76th Annual Meeting of American Finance Association. AFA 2016, San Francisco, CA, United States.