The characteristics and evolution of credit default swap trading

Abstract

This is the first systematic empirical study of the characteristics and the evolution of credit default swap (CDS) trading. We study single name reference entities and find a prevalence of five-year maturities, US5 million and US10 million notional amounts, senior-ranked underlying debt and modified restructuring clauses. We find increased trading up to 2003 and an increased ratio of trades to quotes in recent years. A decrease in daily volume since 2004 is likely to be caused by the recent increased use of CDS index-related products. The majority of reference entities have credit ratings from at least one international rating agency, and the average credit quality of the universe fluctuates during the sample period. Trading activity demonstrates an inverse U shape across the week.Journal of Derivatives & Hedge Funds (2007) 13, 186–198. doi:10.1057/palgrave.jdhf.1850073 [ABSTRACT FROM AUTHOR]