Hedging with Credit Derivatives in Response to Operational Risk in Supply Chain Hierarchical

Posted: 1 Feb 2018

See all articles by Nan Hu

Nan Hu

Xi'an Jiaotong University (XJTU) - School of Management; Stevens Institute of Technology - School of Business

Lu Zhu

California State University, Long Beach - College of Business Administration

Peng Liang

Xi'an Jiaotong University (XJTU) - School of Management; International Institute of Finance, School of Management, University of Science and Technology of China

Date Written: January 1, 2018

Abstract

In this paper, using newly available CDS positions data compiled from DTCC and the supply chain hierarchical position obtained from networking methodology, we examine whether and how investors can use CDS contracts to manage the heightened operational risk due to upstream supply chain hierarchical position. We find that further upstream position within supply chain network is associated with more CDS trading positions. The positive relation holds up to different proxies for CDS open positions and model specifications, and moreover, it is more pronounced for firms with poor information environment. Our results suggest that investors appear to employ CDS contracts to actively hedge against the reference entities’ operational risk in supply chain.

Keywords: Hierarchical Position, Supply Chain, Operational Risk, Credit Default Swap (CDS) Positions, Information Asymmetry, The Depository Trust & Clearing Corporation (DTCC)

JEL Classification: G21, G32, G30

Suggested Citation

Hu, Nan and Hu, Nan and Zhu, Lu and Liang, Peng, Hedging with Credit Derivatives in Response to Operational Risk in Supply Chain Hierarchical (January 1, 2018). Available at SSRN: https://ssrn.com/abstract=3108154

Nan Hu (Contact Author)

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Lu Zhu

California State University, Long Beach - College of Business Administration ( email )

1250 Bellflower Blvd.
Long Beach, CA 90840
United States

Peng Liang

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

International Institute of Finance, School of Management, University of Science and Technology of China ( email )

Hefei, Anhui
China

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