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Economic Quarterly

Third Quarter 2020

Sovereign CDS Market: The Role of Dealers in Credit Events

Lawrence Jia, Bruno Sultanum and Elliot Tobin

In this paper, we study the credit default swaps (CDS) position of the main dealers in the CDS market close to credit events of sovereign countries. We focus on the credit events of three countries that have faced significant financial distress in the past decade: Argentina, Venezuela, and Ukraine. After introducing the historical background of each country, we find that CDS dealers, defined as the top ten traders of CDS in their respective countries, tend to sell sovereign CDS (hold more negative or less positive positions) when yields/CDS spreads go up. This finding suggests that dealers perform the role of liquidity providers in times of financial distress and take the credit risk that smaller traders want to unload into the market.

DOI: https://doi.org/10.21144/eq1060301

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