CDS and credit
testing the small bang theory of the financial universe with micro data
Published on 19. June 2017
Book
Paperback/Softback
37 pages
978-3-95729-368-8 (ISBN)
Unfortunately, price unknown
Article is exhausted; no reprint
Description
Does hedging motivate CDS trading and does that affect the availability of credit? To answer these questions we couple comprehensive bank-firm level CDS trading data from the Depository Trust and Clearing Corporation with the German credit register containing bilateral bank-firm credit exposures. We find that following the Small Bang in the European CDS market, extant credit relationships with riskier firms increase banks' CDS trading and hedging of these firms. Properly hedged banks holding more CDS contracts of riskier firms supply relatively more credit to these firms. Our results are overall stronger for firm CDSs experiencing larger improvements in liquidity.