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date: 07 October 2022

Corporate Credit Derivativeslocked

Corporate Credit Derivativeslocked

  • George BattaGeorge BattaRobert Day School of Economics and Finance, Claremont McKenna College
  •  and Fan YuFan YuRobert Day School of Economics and Finance, Claremont McKenna College

Summary

Corporate credit derivatives are over-the-counter (OTC) contracts whose payoffs are determined by a single corporate credit event or a portfolio of such events. Credit derivatives became popular in the late 1990s and early 2000s as a way for financial institutions to reduce their regulatory capital requirement, and early research treated them as redundant securities whose pricing is tied to the underlying corporate bonds and equities, with liquidity and counterparty risk factors playing supplementary roles. Research in the 2010s and beyond, however, increasingly focused on the effects of market frictions on the pricing of CDSs, how CDS trading has impacted corporate behaviors and outcomes as well as the price efficiency and liquidity of other related markets, and the microstructure of the CDS market itself. This was made possible by the availability of market statistics and more granular trade and quote data as a result of the broad movement of the OTC derivatives market toward central clearing.

Subjects

  • Financial Economics

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