Trading Credit Default Swaps via Interdealer Brokers |
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Authors: | Yalin Gündüz Torsten Lüdecke Marliese Uhrig-Homburg |
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Institution: | (1) Institute of Finance, Banking, and Insurance, University of Karlsruhe (TH), 76128 Karlsruhe, Germany |
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Abstract: | Credit default swaps (CDSs) are among the most successful financial innovations of recent years, which is reflected in the
rapidly expanding market. CDS trading occurs in the over-the-counter market, which relies heavily on broker intermediation
to arrange trades. We provide empirical evidence that liquidity in the voice brokered market varies with the particulars of
the CDS contracts and that the differences in market structure is reflected in the costs of liquidity. Moreover, the brokered
and direct interdealer trading markets seem to be well integrated; thus the higher liquidity costs in the brokered market
may reflect the value of intermediation. Hybrid market structures, which combine voice brokerage with an electronic platform,
are discussed as a viable alternative to fully automated trading systems.
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Keywords: | Credit default swaps market microstructure over-the-counter trading interdealer brokerage liquidity |
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