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The impact of central clearing on the market for single-name credit default swaps
Affiliation:1. HEC Montréal and Deloitte LLP, Canada;2. UQAM School of Management, Canada;3. HEC Montréal, Canada;4. Canada Research Chair in Risk Management, HEC Montréal, Canada;1. College of Business, Hallym University, Gangwon-do 24252, Republic of Korea;2. School of Business, Southern Illinois University Edwardsville, IL 62025, USA;3. College of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul 03063, Republic of Korea;1. ICMA Centre, Henley Business School, University of Reading, Whiteknight Campus, Reading, UK;2. Robert Day School of Economics and Finance, Claremont McKenna College, 888N Columbia Avenue, Claremont, California, USA;3. College of Business, California State University, Long Beach, 1250 Bellflower Boulevard, Long Beach, CA, 90840, USA;1. Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford CM1 1SQ, United Kingdom;2. Department of Economics, Northeastern Illinois University, 5500 N St Louis Ave, BBH 344G, Chicago, IL 60625, USA;3. Department of Economics, University of Pretoria, Pretoria 0002, South Africa;4. Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China;5. School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing, China;1. Manhattan College, United States;2. HEC Montréal, Canada;1. School of Statistics, Jilin University of Finance and Economics, Changchun 130117, China;2. School of International Economics and Business, Nanjing University of Finance and Economics, Nanjing 210023, China
Abstract:In this article, we revisit the impact of the voluntary central clearing scheme on the CDS market. In order to address the endogeneity problem, we use a robust methodology that relies on dynamic propensity-score matching combined with generalized difference-in-differences. Our empirical findings show that central clearing results in a small increase in CDS spreads (ranging from 14 to 19 bps), while there is no evidence of an associated improvement in CDS market liquidity and trading activity or of a deterioration in the default risk of the underlying bond. These results suggest that the increase in CDS spreads can be mainly attributed to a reduction in CDS counterparty risk.
Keywords:Credit default swaps  Central clearing  Counterparty risk  Liquidity  Trading activity  Bond default spread  Difference-in-differences  Parallel trend
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