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Safe Haven CDS Premiums

Sven Klingler1; David Lando2

1 BI Norwegian Business School · 2 Copenhagen Business School, CEPR

Review of Financial Studies 2018 open access

Credit default swaps can be used to lower the capital requirements of dealer banks entering 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 the volume of contracts outstanding, effects of regulatory proxies, and the corporate bond and CDS markets support that CDS contracts are used for capital relief. (

DOI
10.1093/rfs/hhy021
Volume
31 (5)
Pages
1856-1895
Language
en
Export
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Sources
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