Why do investors buy sovereign default insurance?

We provide a comprehensive analysis of the determinants of trading in the sovereign credit default swaps (CDS) market, using weekly data for single-name sovereign CDS from October 2008 to September 2015. We describe the 
We provide a comprehensive analysis of the determinants of trading in the sovereign credit default swaps (CDS) market, using weekly data for single-name sovereign CDS from October 2008 to September 2015. We describe the anatomy of the sovereign CDS market, derive a law of motion for gross positions and their components, and identify the key factors that drive the cross-sectional and time-series properties of trading volume and net notional amounts outstanding. While a single principal component accounts for 54 percent of the variation in sovereign CDS spreads, the largest common factor explains only 7 percent of the variation in sovereign CDS net notional amounts outstanding. Moreover, unlike for CDS spreads, common global factors explain very little of the variation in sovereign CDS trading and net notional amounts outstanding, suggesting that it is driven primarily by idiosyncratic country risk. We analyze several local and regional channels that may explain the trading in sovereign CDS: (a) country-specific credit risk shocks, including changes in a country's credit rating and related outlook changes, (b) the announcement and issuance of domestic and international debt, (c) macroeconomic sentiment derived from conventional and unconventional monetary policy, macro-economic news and shocks, and (d) regulatory channels, such as changes in bank capital adequacy requirements. All our findings suggest that sovereign CDS are more likely used for hedging than for speculative purposes.
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Metadaten
Author:Patrick Augustin, Valeri Sokolovski, Marti G. Subrahmanyam
URN:urn:nbn:de:hebis:30:3-416610
URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2848944
DOI:http://dx.doi.org/10.2139/ssrn.2848944
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 540
Series (Serial Number):CFS working paper series (540)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2016
Year of first Publication:2016
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2016/10/18
Tag:Banking Regulation; Basel III; Contagion; Credit Default Swaps; OTC; Sovereign Credit Risk; Systemic Risk
Issue:March 14, 2016
Pagenumber:96
HeBIS PPN:39027092X
Institutes:Wirtschaftswissenschaften
Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:C1 Econometric and Statistical Methods: General
C5 Econometric Modeling
C68 Computable General Equilibrium Models
F34 International Lending and Debt Problems
G12 Asset Pricing; Trading volume; Bond Interest Rates
G13 Contingent Pricing; Futures Pricing
G15 International Financial Markets
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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