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.
Original languageEnglish
Publication date2016
Number of pages47
Publication statusPublished - 2016
EventThe 76th Annual Meeting of American Finance Association. AFA 2016 - San Francisco, CA, United States
Duration: 3 Jan 20165 Jan 2016
Conference number: 76
http://www.afajof.org/details/page/8357781/2016-Meeting-Program.html

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

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