SAIF Seminar Series (12)
Topic: SAIF Seminar Series (12)
Time: Friday , 2010-09-10 12:00-08:00
Speaker: Dragon Tang
Affiliations: The University of Hong Kong
SAIF Seminar Series (12)
星期四,2010-09-10 10:30-12:00
Room 505, Datong Building, 211 West Huaihai Road, SAIF
Dragon Tang

Does the Tail Wag the Dog? The Price Impact of CDS Trading

We investigate empirically whether credit default swaps (CDS) spreads are influenced by shifts in demand/supply dynamics in the market. We find that while changes in CDS spreads are insensitive to accumulated trading volume, net buying interest (NBI), a measure we construct to
measure latent trade imbalance between trades, predicts CDS price changes. Between two consecutive trades, CDS spread increases by 16% for the highest NBI group, but the most negative NBI group (most net selling interest) sees an average decrease of 10% in CDS spreads. 

This price impact of latent trade imbalance exists even in the absence of significant stock price movements. While part of this price impact of net buying interest comes from its information content for future changes in CDS spreads, liquidity of CDS contracts is another source.

We show that the effect of NBI is three times stronger in the least liquid CDS contracts than in the most liquid CDS contracts. Furthermore, funding liquidity attenuates the initial price impact and accelerates the subsequent price reversal.