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Credit Market Choice

Author

Listed:
  • Nina Boyarchenko

    (Federal Reserve Bank of New York)

  • Anna Costello

    (University of Michigan)

  • Or Shachar

    (Federal Reserve Bank of New York)

Abstract

Which markets do institutions use to change exposure to credit risk? Using a unique dataset of transactions in corporate bonds and CDS by large financial institutions, we show that simultaneous transactions in both markets are rare, with an average institution having an eleven percent probability of transacting in both the CDS and the bond market in the same entity in an average week. When institutions do transact in both markets simultaneously, they increase their speculative positions in CDS by 13 cents per dollar of bond transactions, and their hedging positions by 13 cents per dollar of bond transactions. We find evidence that, during the post-crisis rule implementation period, the incentive to use paired transactions is reduced but so is the incentive to take naked positions in the CDS market. When single name contracts become eligible for central clearing, globally systemically important institutions become more likely to use single name CDS contracts. Finally, we show that, in the aggregate, U.S. globally systemically important institutions reduce their exposure to corporate credit risk in the rule implementation period, primarily through reducing the amount of credit protection sold in the index CDS market.

Suggested Citation

  • Nina Boyarchenko & Anna Costello & Or Shachar, 2019. "Credit Market Choice," 2019 Meeting Papers 1271, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1271
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    References listed on IDEAS

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    1. Campello, Murillo & Matta, Rafael, 2012. "Credit default swaps and risk-shifting," Economics Letters, Elsevier, vol. 117(3), pages 639-641.
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    Cited by:

    1. Mark Paddrik & Stathis Tompaidis, 2019. "Market-Making Costs and Liquidity: Evidence from CDS Markets," Working Papers 19-01, Office of Financial Research, US Department of the Treasury.
    2. Czech, Robert, 2021. "Credit default swaps and corporate bond trading," Journal of Financial Intermediation, Elsevier, vol. 48(C).
    3. Richard K. Crump & João A. C. Santos, 2018. "Review of New York Fed studies on the effects of post-crisis banking reforms," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 71-90.
    4. Boyarchenko, Nina & Kovner, Anna & Shachar, Or, 2022. "It’s what you say and what you buy: A holistic evaluation of the corporate credit facilities," Journal of Financial Economics, Elsevier, vol. 144(3), pages 695-731.
    5. Augustin, Patrick & Sokolovski, Valeri & Subrahmanyam, Marti G. & Tomio, Davide, 2022. "How sovereign is sovereign credit risk? Global prices, local quantities," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 92-111.

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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