Abstract
We investigate execution quality issues in the OTC single-name credit default swap (CDS) market using confidential transactions-level trade repository data. Specifically, we analyze the impact of counterparties’ matching and negotiation abilities on the terms of trade of CDS contracts, under incomplete information about market liquidity and quotes. We show that execution cost of a CDS transaction, measured as the deviation of the traded CDS spread from the market consensus spread, is explained, in part, by the counterparties’ trading activity level, trading networks, and trading relationships. Further, we test the importance of these determinants of execution cost under stressed market conditions, such as a crisis regime, low trading volume and high market volatility.
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