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Robert Czech

Robert Czech

is a Research Economist in the Capital Markets Division within our Financial Stability and Strategy Directorate. His research is mainly focused on the structure and interconnectedness of credit markets, with a particular interest in the sterling corporate bond market. Robert’s research interests also include exchange-traded funds (ETFs), central clearing and the structure of over-the-counter (OTC) derivatives markets. Robert holds a PhD in Finance from Imperial College London, and a BSc and MSc in Business Administration (Major Finance) from the University of Cologne.

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Robert Czech: Credit Default Swaps and Corporate Bond Trading

Using regulatory data on CDS holdings and corporate bond transactions, I provide evidence for a liquidity spillover effect from CDS to bond markets. Bond trading volumes are larger for investors with CDS positions written on the debt issuer, in particular around rating downgrades. I use a quasi-natural experiment to validate these findings. I also provide causal evidence that CDS mark-to-market losses lead to fire sales in the bond market. I instrument for the prevalence of mark-to-market losses with the ratio of non-centrally cleared CDS contracts of an individual counterparty. The monthly corporate bond sell volumes of investors exposed to large mark-to-market losses are three times higher than those of unexposed counterparties. Returns decrease by more than 100 bps for bonds sold by exposed investors, compared to same-issuer bonds sold by unexposed investors. My findings underline the risk of a liquidity spiral in the credit market.

Last modified: 2019.08.26.