What do we know about speculation in the CDS market?

Norden, Lars; Radoeva, Kristina

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.

Additional Metadata
Keywords	credit risk, credit derivatives, trading motives, speculation, bankruptcy
JEL	Information, Knowledge, and Uncertainty: General (jel D80), Expectations; Speculations (jel D84), Information and Market Efficiency; Event Studies (jel G14), Financial Institutions and Services: General (jel G20)
Persistent URL	hdl.handle.net/1765/76928
Organisation	Rotterdam School of Management (RSM), Erasmus University
Citation APA Style AAA Style APA Style Cell Style Chicago Style Harvard Style IEEE Style MLA Style Nature Style Vancouver Style American-Institute-of-Physics Style Council-of-Science-Editors Style BibTex Format Endnote Format RIS Format CSL Format DOIs only Format	Norden, L., & Radoeva, K. (2012). What do we know about speculation in the CDS market?. Retrieved from http://hdl.handle.net/1765/76928

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What do we know about speculation in the CDS market?

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