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What Do We Know About Speculation in the CDS Market?

Midwest Finance Association 2013 Annual Meeting Paper

34 Pages Posted: 20 Sep 2012 Last revised: 14 Mar 2013

See all articles by Lars Norden

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Kristina Radoeva

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Date Written: March 2, 2013

Abstract

We measure speculation in the CDS market and investigate its determinants. The CDS volume on a firm that exceeds its outstanding debt (= naked CDS) indicates speculation since hedging can be ruled out. Using weekly CDS trading volume data for actively traded U.S. firms during 2008-2012, we provide evidence for substantial speculation in the CDS market. The median (mean) ratio of the firm-specific CDS volume to total debt is 1.8 (3.6) and the maximum is 65, with values above one being consistent with speculation. We further show that the extent and likelihood of speculation varies across industries, and it significantly increases in firm default risk and decreases with firm size and profitability.

Keywords: Credit Risk, Credit Derivatives, Trading Motives, Speculation, Bankruptcy

JEL Classification: D80, D84, G10, G14, G20

Suggested Citation

Norden, Lars and Radoeva, Kristina, What Do We Know About Speculation in the CDS Market? (March 2, 2013). Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2148616 or http://dx.doi.org/10.2139/ssrn.2148616

Lars Norden (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Kristina Radoeva

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

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