Dealing with Dealers: Sovereign CDS Comovements
43 Pages Posted: 11 Jul 2017 Last revised: 15 Jul 2017
Date Written: July 7, 2017
We show that sovereign CDS that have common dealers tend to be more correlated, especially when the dealers display similar quoting activity in those contracts over time. This commonality in dealers’ activity is a powerful driver of CDS comovements, over and above fundamental similarities between countries, including default, liquidity, and macro factors. We posit that the mechanism causing the excess correlation is the buying pressure faced by CDS dealers for credit enhancements and regulatory capital reliefs. An instrumental variable analysis confirms that our findings are indeed rooted in a causal relationship.
Keywords: Sovereign CDS, Comovements, Commonalities, Dealers
JEL Classification: G12, G14
Suggested Citation: Suggested Citation