Over the past decade, the Credit Default Swap (CDS) market structure has changed from a traditional bilateral contract environment to central clearing after the Dodd-Frank Act. This study examines the impact of central clearing on the information quality of single-name CDS. Using the gradual introduction of the central counterparty as market efficiency shocks under the staggered difference-in-difference framework, I provide causal evidence that the predictability of corporate bond return via CDS spread innovations is significantly enhanced when the CDS is included in the central counterparty. Consistent with a hypothesis that the central clearing counterparty improves CDS market efficiency by reducing counterparty risk and associated costs, delayed price discovery is evident in the relatively inefficient market. An ensuing analysis examines the overall economic significance of cross-market price discovery based on trading strategies. For corporate bonds with centrally cleared CDS, an increase in CDS spread significantly underperforms those with a decrease in CDS spread by 4.33% per year, which is not explained by risk compensations.
“How to (Properly) Compute Credit Default Swap Returns”
(with Le Kang, Hwagyun Kim, Ju Hyun Kim, Sorin Sorescu)
🔹The Review of Asset Pricing Studies (Reject & Resubmit)
This paper proposes empirical methods to measure Credit Default Swap (CDS) return and explores its factor structure. We find that approximated CDS returns deviate significantly from actual returns based on the upfront fee, computed with protection sellers' cash flows. Past CDS returns and the skewness positively predict CDS returns, suggesting that CDS buyers have lottery preferences and CDS sellers are either overconfident or speculative in trading. Conventional pricing factors have weak explanatory power. Corporate bonds have spillover effects on future CDS returns in that a zero-cost portfolio sorted by statistical moments of past bond returns explains the CDS cross-section.
“Explaining Stock Market Anomalies with Equity Duration”
[Draft coming soon]
I study the driving force of stock market anomalies with the equity duration. My framework defines the aggregate stock market portfolio as a combination of dividend strips that pay dividends at different time horizons. The slope of the portfolio weight term structure represents the equity duration. The equity duration decreases (increases) when the representative investor weights more on short-term (long-term) assets. Acting like investor sentiment, the estimated equity duration proxy captures the investor's investment horizon. I find that the anomalies related to the investment horizon are well explained by the movement of equity duration.
“Policy Uncertainty and the Term Structure of Market Volatility”
(with Melissa Song and Tatevik Sekhposyan)
“Risk Aversion, Uncertainty, and Monetary Policy in Zero Lower Bound Environments”
(with Jaehoon Hahn and Woon Wook Jang), Economics Letters, (2017)