Impact Of The Ban On Uncovered sCDS Trade On The Interdependencies Between The CDS Market And Other Sectors Of Financial Markets. The Case Of Safe And Developed Versus Risky And Developing European Markets

Abstract

<jats:p>The aim of the article is to verify the impact of the ban on uncovered sCDS trade in Europe on the interdependencies between the sCDS market and other sectors of financial markets. We analyse two European markets: the safe and developed Swedish market, and the risky and developing Hungarian one. The study covers the period from October 2008 to October 2013. We analyse changes in the interdependencies between the sCDS market and the bond market, as well as between the sCDS market and the stock exchange. We found out that in the case of the safe Swedish market, the strength of relationships of each sector of financial markets with the sCDS one was much weaker than in the case of Hungary, which may suggest that the Swedish market is less prone to crisis transmission arising from herd behaviour or speculative attacks. In the end we show that in the two economies, the influence of the sCDS market on the other sectors of financial market indeed diminished following introduction of the ban on uncovered sCDS trade.</jats:p>

The sovereign credit default swap market – is there anything to be afraid of? A comparison of selected central and western european economies

“…The others were sovereign bonds and the stock exchange markets. This study extends the research by Kliber (2016) who analysed changes in the dynamic conditional correlation between sCDS and the domestic financial markets in Hungary and Sweden, as well as Kliber (2017).…”

“…One can suspect that something happened then that changed the relationships between the markets, but the authors did not test any alternative international events. Kliber (2016) showed that such a change in relationships happened in Hungary and Sweden during the period between the announcement of the reform and the moment of its implementation, while the ISDA ( 2014) study shows that liquidity was dropping gradually from the announcement to the implementation. This is especially visible in the example of Hungary -the moment of change and the moment of implementation of domestic reforms took place at roughly the same time (see also : Orlowski and Tsibulina, 2014).…”

“…The relationships between sCDS and the sovereign bonds market have already been widely studied in the literature, but the results are ambiguous. Scheicher (2010 and2016) documented that before September 2008 no lead-lag relationship was present between sCDS and the bond markets, while afterwards such relationships appeared but their direction was country-specific. According to Coudert and Gex (2011), the direction of a lead-lag relationship between the two markets depended on whether the bonds were of a low or high yield.…”

“…First, we analyse the possible causality from sCDS market to other financial markets within a country, interpreting the results as the degree of immunity against volatility transmission or herd behaviour. Second, we analyse the role of the new regulations from November 2012 on the strength of those relationships, extending the study of Kliber (2016) and Kliber (2017), where the influence of the global factor had not been taken into account. We end our sample in 2013, i.e.…”