Safe Haven CDS Premiums

Sven Klingler, David Lando

Research output: Working paperResearch

Abstract

Credit Default Swaps can be used to lower capital requirements of dealer banks who enter into uncollateralized derivatives positions with sovereigns. We show in a model that the regulatory incentive to obtain capital relief makes CDS contracts valuable to dealer banks and empirically that, consistent with the use of CDS for regulatory purposes, there is a disconnect between changes in bond yield spreads and in CDS premiums especially for safe sovereigns. Additional empirical tests related to volumes of contracts outstanding, effects of regulatory proxies, and the corporate bond and CDS markets support that CDS contracts are used for capital relief.
Credit Default Swaps can be used to lower capital requirements of dealer banks who enter into uncollateralized derivatives positions with sovereigns. We show in a model that the regulatory incentive to obtain capital relief makes CDS contracts valuable to dealer banks and empirically that, consistent with the use of CDS for regulatory purposes, there is a disconnect between changes in bond yield spreads and in CDS premiums especially for safe sovereigns. Additional empirical tests related to volumes of contracts outstanding, effects of regulatory proxies, and the corporate bond and CDS markets support that CDS contracts are used for capital relief.
LanguageEnglish
Place of PublicationLondon
PublisherCentre for Economic Policy Research
Pages85
StatePublished - 2018
SeriesCentre for Economic Policy Research. Discussion Papers
NumberDP12694
ISSN0265-8003

Keywords

  • Capital charges
  • CDS premiums
  • CDS-bond basis
  • CVA

Cite this

Klingler, S., & Lando, D. (2018). Safe Haven CDS Premiums. (pp. 85). London: Centre for Economic Policy Research. Centre for Economic Policy Research. Discussion Papers, No. DP12694
Klingler, Sven ; Lando, David. / Safe Haven CDS Premiums. London : Centre for Economic Policy Research, 2018. pp. 85 (Centre for Economic Policy Research. Discussion Papers; No. DP12694).
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Klingler, S & Lando, D 2018 'Safe Haven CDS Premiums' Centre for Economic Policy Research, London, pp. 85.

Safe Haven CDS Premiums. / Klingler, Sven; Lando, David.

London : Centre for Economic Policy Research, 2018. p. 85.

Research output: Working paperResearch

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Klingler S, Lando D. Safe Haven CDS Premiums. London: Centre for Economic Policy Research. 2018, p. 85.