آیا تجارت CDS باعث بهبود بازار اوراق قرضه مشارکتی شده است؟

Financial innovation through the creation of new markets and securities impacts related markets as well, changing their efficiency, quality (pricing error), and liquidity. The credit default swap (CDS) market was undoubtedly one of the salient new markets of the past decade. In this paper we examine whether the advent of CDS trading was beneficial to the underlying secondary market for corporate bonds. We employ econometric specifications that account for information across CDS, bond, equity, and volatility markets. We also develop a novel methodology to utilize all observations in our data set even when continuous daily trading is not evidenced, because bonds trade much less frequently than equities. Using an extensive sample of CDS and bond trades over 2002–2008, we find that the advent of CDS was largely detrimental. Bond markets became less efficient, evidenced no reduction in pricing errors, and experienced no improvement in liquidity. These findings are robust to various slices of the data set and specifications of our tests.

A major innovation in the fixed-income and credit markets since the turn of the century is the introduction of the credit default swap (CDS), a credit insurance contract with a payoff linked to that of the default or change in credit characteristics of an underlying reference bond or issuer. Innovation, however, is a double-edged sword with likely mixed positive and negative outcomes. The creation of new securities could complete markets and favorably impact information generation and dissemination, as well as liquidity, yet, such innovations could also have negative externalities if the gains accrue to only a few market participants and cause an adverse impact on the rest of the market. In this paper we examine whether the advent of the CDS market improved the secondary corporate bond market in terms of its underlying efficiency, market quality, and liquidity.1 Taking a time series perspective, we examine the following question: did an issuer's bonds become more efficient and liquid after CDS trading was instituted on the reference instruments of the issuer? From a cross sectional perspective, we query: Are bonds of firms with traded CDS contracts more efficient and liquid than bonds of firms without any CDS contracts? Did corporate bond trading decline after the introduction of CDSs because traders were able to implement a credit view better and more cheaply in the CDS markets? Fig. 1 shows the mean size of bond trades relative to the date of inception of CDS trading for our sample of firms with traded CDS contracts benchmarked to a control sample of firms with no CDS introduction. The mean trade size falls in the two years following CDS introduction, indicating an evident decline in secondary bond market activity. Similarly, Fig. 2 depicts a likely drop in mean turnover of bonds of issuers with CDS contracts once CDS trading begins, with no appreciable change for control sample bonds.

The credit default swap market was one of the salient new markets of the past decade. Trading in CDS has been blamed for the speculative frenzy leading to the beginning of the financial crisis in 2008, though Stulz (2010) concludes that credit default swaps were not responsible for causing or worsening the crisis. Nobelist Joseph Stiglitz went so far as to suggest that CDS trading by large banks should be banned.23 Still, the creation of new markets could have beneficial information and liquidity effects on underlying markets. Conrad (1989) and Skinner (1989) show that options trading reduced volatility in underlying equity markets. In sovereign bond markets, Ismailescu and Phillips (2011) provide evidence that the introduction of credit default swaps improved efficiency in the underlying sovereign bonds. We examine whether CDS trading was beneficial to bonds in reference names by looking at whether informational efficiency, market quality, and liquidity improved once CDS trading commenced. Our econometric specification accounts for information across CDS, bond, equity, and volatility markets. We also develop a novel methodology to utilize all observations in our data set even when continuous daily trading is not evidenced, because bonds trade much less frequently than equities. The empirical evidence suggests that the advent of CDS was largely detrimental to secondary bond markets. Bond markets became less efficient relative to other securities and evidenced greater pricing errors and lower liquidity. These findings are robust to various slices of the data set and specifications of our tests. Our findings have bearings on the recent CDS market regulatory reform proposals and the debate surrounding the impact and usefulness of CDS markets. Whereas we examine bond market efficiency, quality, and liquidity, this research did not examine the effect on credit, i.e., the impact on the quality of firms that experienced CDS introduction. Our endogeneity corrections did note that bond returns are negatively related to the implicit probability of CDS introduction, complementing the comprehensive analysis of this issue in Subrahmanyam, Tang, and Wang (2011). Other open questions remain that are not considered in this paper. Does CDS trading make forecasting default easier for reference names than for firms on which no CDS trades? How do capital structures change for firms that have CDSs traded versus firms with no CDSs? How does ratings volatility change when CDSs are introduced? Are firms that have CDSs traded more likely or less likely to have securitized debt? And, eventually, how does the trading of CDSs on centralized exchanges change the information environment for CDSs and bonds? These issues and questions are left for future research.