Safe-Haven CDS Premiums
Event details
| Date | 26.09.2016 |
| Hour | 14:00 › 15:00 |
| Speaker | David LANDO (Copenhagen Business School) |
| Location | |
| Category | Conferences - Seminars |
We develop a model in which a derivatives dealer bank faces capital charges arising from uncollateralized swap positions, and buys Credit Default Swap (CDS) contracts from end users to obtain capital relief. The equilibrium CDS premium depends on the margin requirements for buyers and sellers of CDS contracts, the value of capital relief for the dealer bank, and the risk and return profile of a risky asset that is held both by the derivatives dealer and the end user. We explain the mechanics of the regulatory requirements that drive derivatives dealers to buy CDS in order to obtain capital relief. We use the details of the regulation to translate statistics on the volumes of derivatives contracts outstanding into a CDS hedging demand arising from these positions. Using CDS data on several sovereigns, we argue that CDS premiums for safe-haven sovereigns, like Germany and the United States, are likely driven more by regulatory requirements than by credit risk.
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