CDS Price Volatility Shows The Limits Of Regulation [Study]

A recent working paper from the Treasury’s Office of Financial Research found that the high concentration of credit default swap (CDS) buyers (about five cover half the market) adds to price volatility because idiosyncratic shocks to one of the ‘megasellers’ has such a big impact on spreads.

“Fluctuations of the five largest sellers in the market account for nearly one-ninth of the variation in weekly CDS spread movements. To put this in perspective, observable firm-level and macroeconomic factors explain only one-sixth of spread variation over the same time period,” writes Emil Siriwardane for the Treasury’s Office of Financial Research and NYU Stern School of Business in his working paper Concentrated Capital Losses and the Pricing of Corporate Capital...