CDS and credit: Testing the small bang theory of the financial universe with micro data

Yalin Gündüz, Steven Ongena, Günseli Tümer-Alkan and Yuejuan Yu

No 16/2017, Discussion Papers from Deutsche Bundesbank

Abstract: 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.

Keywords: credit default swaps; credit exposure; hedging; bank lending; Depository Trust and Clearing Corporation (DTCC) (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn, nep-fmk and nep-sbm
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:162017

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