The characteristics and evolution of credit default swap trading

BBA (2002) ‘2001/2002 Credit Derivatives Survey’, British Bankers Association, London.

Patel, N. (2003) ‘Credit Derivatives Survey: Flow Business Booms’, Risk, Vol. 16, pp. 20–23.

ISDA (2005) ‘Mid-Year Market Survey’, International Swaps and Derivatives Association, New York.

Longstaff, F., Mithal, S. and Neis, E. (2005) ‘Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market’, Journal of Finance, Vol. 60, pp. 2213–2253.

Blanco, R., Brennan, S. and Marsh, I.W. (2005) ‘An Empirical Analysis of the Dynamic Relation Between Investment-Grade Bonds and Credit Default Swaps’, Journal of Finance, Vol. 60, pp. 2255–2281.

FitchRatings (2004) ‘CDS Market Liquidity: Show Me the Money’, FitchRatings, New York.

Another measure of the growth of the market is the outstanding notional amount.

Aunon-Nerin, D., Cossin, D., Hricko, T. and Huang, Z. (2002) ‘Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data: Is Fixed-Income Markets’ Information Sufficient to Evaluate Credit Risk?’, Working Paper, University of Lausanne.

Houweling, P. and Vorst, T. (2003) ‘Pricing Default Swaps: Empirical Evidence’, Paper presented at Forecasting Financial Markets Conference, Paris.

Ericsson, J., Jacobs, K. and Oviedo-Helfenberger, R. (2004) ‘The Determinants of Credit Default Swap Premia’, Working Paper, McGill University.

Hull, J., Predescu, M. and White, A. (2004) ‘The Relationship Between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements’, Working Paper, University of Toronto.

CreditTrade, incorporated into the UK, is a leading broker in global credit markets, specialised in CDS and secondary loans. CreditTrade provides CDS transaction services through an internet-based online trading platform or through telephone.

Polyn, G. (2002) ‘CDS: The quest for neutral pricing data’, Risk, Special Report, www.risk.net .

The rank information for the remaining 0.2 per cent of the sample is not available.

Hull, J. and White, A. (2004) ‘Valuation of a CDO and an Nth to Default CDS Without Monte Carlo Simulation’, Working Paper, University of Toronto.

FitchRatings (2005) ‘Synthetic Structured Finance Assets and Associated Valuation Processes: Help or Hindrance?’, FitchRatings, New York.

FitchRatings (2003) ‘Fitch Examines the Effect of 2003 Credit Derivatives Definitions’, FitchRatings, New York.

Before January 2003, users of CreditTrade’s trading platform could enter CDS quotes without specifying the notional amount; therefore, there are a substantial number of CDS price observations without notional amount (appearing in the data as ‘0’). These quotations without notional amount recorded are excluded from the descriptive statistics presented here.

For example, instead of bidding for protection on a notional amount of $20 million, the protection buyer can execute four $5 million contracts at the same time. Hence, a buyer can lock on a desired price at the time of quoting. Breaking down longer maturities into shorter maturities involves roll-over that bears price risk.

FitchRatings was formed by the merger of Fitch IBCA and Duff & Phelps Credit Rating Co (DCR) in June 2000 and FitchRatings acquired Thomson BankWatch in December 2000. Canadian Bond Rating Services was acquired by S&P in October 2000.

Di Cesare, A. (2005) ‘Do Market-Based Indicators Anticipate Rating Agencies? Evidence for International Banks’, Working Paper, Bank of Italy.

Hamilton, D.T. and Cantor, R. (2005) ‘Rating Transitions and Default Conditional on Rating Outlooks Revisited: 1995–2005’, Special Comment. Moody's Investors Service.

FitchRatings (2004) ‘Global Credit Derivatives Survey: Single-Name CDS Fuel Growth’, FitchRatings, New York.

FitchRatings (2006) ‘Global Credit Derivatives Survey: Indices Dominates Growth As Banks' Risk Position Shifts’, FitchRatings, New York.

Moore, P. (2004) ‘The Spread of iTraxx’, Credit’, Incisive Media, London.

Foster, F.D. and Viswanathan, S. (1990) ‘A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets’, The Review of Financial Studies, Vol. 3, pp. 593–624.

Fink, R. (2004) ‘Default Swap Faults’, CFO Magazine, www.cfo.com .

Rule, D. (2001) ‘The Credit Derivatives Market: Its Development and Possible Implications for Financial Stability’, Financial Stability Review, No. 10, pp. 117–140.

Skinner, F.S. and Diaz, A. (2003) ‘An Empirical Study of Credit Default Swaps’, The Journal of Fixed Income, Vol. 13, pp. 28–38.

Tett, G. (2005) ‘Banks warned on insider trading threat posed by market for credit derivatives’, Financial Times, London.