Trading Credit Default Swaps Via Interdealer Brokers

Posted: 12 May 2006 Last revised: 18 Nov 2015

See all articles by Yalin Gündüz

Yalin Gündüz

Deutsche Bundesbank

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Torsten Luedecke

University of Karlsruhe (TH)

Date Written: April 28, 2006

Abstract

Credit default swaps (CDSs) are among the most successful financial innovations of recent years, which is reflected in the rapidly expanding market. CDS trading occurs in the over-the-counter market, which relies heavily on broker intermediation to arrange trades. We provide empirical evidence that liquidity in the voice brokered market varies with the particulars of the CDS contracts and that the differences in market structure is reflected in the costs of liquidity. Moreover, the brokered and direct interdealer trading markets seem to be well integrated; thus the higher liquidity costs in the brokered market may reflect the value of intermediation. Hybrid market structures, which combine voice brokerage with an electronic platform, are discussed as a viable alternative to fully automated trading systems.

Keywords: Credit default swaps, market microstructure, over-the-counter trading, interdealer brokerage, liquidity

JEL Classification: G15, G24

Suggested Citation

Gündüz, Yalin and Uhrig-Homburg, Marliese and Luedecke, Torsten, Trading Credit Default Swaps Via Interdealer Brokers (April 28, 2006). Journal of Financial Services Research, Vol. 32, 2007, Available at SSRN: https://ssrn.com/abstract=900075

Yalin Gündüz (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

Torsten Luedecke

University of Karlsruhe (TH) ( email )

Postbox
76128 Karlsruhe, DE 76128
Germany

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