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  • October 2019
  • Article
  • Journal of Finance

Limited Investment Capital and Credit Spreads

By: Emil N. Siriwardane
  • Format:Print
  • | Pages:57
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Abstract

Using proprietary credit default swap (CDS) data, I investigate how capital shocks at protection sellers impact pricing in the CDS market. Seller capital shocks—measured as CDS portfolio margin payments—account for 12% of the time-series variation in weekly spread changes, a significant amount given that standard credit factors account for 18% during my sample. In addition, seller shocks possess information for spreads that is independent of institution-wide measures of constraints. These findings imply a high degree of market segmentation and suggest that frictions within specialized financial institutions prevent capital from flowing into the market at shorter horizons.

Keywords

Credit Risk; Derivatives; Credit Derivatives and Swaps; Capital Markets; Credit; Financial Institutions

Citation

Siriwardane, Emil N. "Limited Investment Capital and Credit Spreads." Journal of Finance 74, no. 5 (October 2019): 2303–2347.

Supplemental Information

Data Appendix
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About The Author

Emil N. Siriwardane

Finance
→More Publications

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