Market Structure and Transaction Costs of Index CDSs
PIERRE COLLIN-DUFRESNE
Search for more papers by this authorBENJAMIN JUNGE
Search for more papers by this authorCorresponding Author
ANDERS B. TROLLE
Pierre Collin-Dufresne is at EPFL and Swiss Finance Institute. Benjamin Junge is at Capital Fund Management. Anders B. Trolle is at HEC Paris and Copenhagen Business School. We thank Stefan Nagel (the Editor), two anonymous referees, Bruno Biais, Darrell Duffie, Thierry Foucault, Larry Glosten, Michael Johannes, René Kallestrup, Laurence Lescourret, Albert Menkveld, Ioanid Rosu, Grigory Vilkov, Søren Willemann, Hongjun Yan, Zhaodong Zhong, Alex Zhou, Haoxiang Zhu, and seminar participants at the Bank of England, BI Norwegian Business School, Boston University, the Commodity Futures Trading Commission, Cornerstone Research, Deutsche Bundesbank, EPFL, ESSEC, the European Central Bank, the Federal Reserve Bank of New York, the Federal Reserve Board, Frankfurt School of Finance & Management, HEC Paris, Lombard Odier, McGill University, Rutgers University, University of New South Wales, University of St. Gallen, the 12th Annual Central Bank Conference on Microstructure of Financial Markets, the 2016 Paris Finance Meeting, the 2016 SFI Research Days, the 2017 Chicago Financial Institutions Conference, the 2017 Fixed Income and Financial Institutions Conference, the 2017 Four Nations Cup, the Midwest Finance Association 2017 meeting, the American Finance Association 2018 meeting, the Northern Finance Association 2018 meeting, the 2018 FRIC conference, the 2018 NFI conference, the 2018 Paris Microstructure Forum, and the Society for Financial Econometrics 2018 conference for comments and suggestions. Collin-Dufresne acknowledges research support from the Swiss Finance Institute. Trolle acknowledges support from the Investissements d'Avenir Labex (ANR-11-IDEX-0003/Labex Ecodec/ANR-11-LABX-0047) and the Danish Finance Institute. The authors do not have any conflicts of interest as identified in The Journal of Finance disclosure policy.
Correspondence: Anders B. Trolle, HEC Paris, Finance Department, 1 Rue de la Libération, Yveline, Jouy-en-Josas, 78350, France; e-mail: trolle@hec.fr.
Search for more papers by this authorPIERRE COLLIN-DUFRESNE
Search for more papers by this authorBENJAMIN JUNGE
Search for more papers by this authorCorresponding Author
ANDERS B. TROLLE
Pierre Collin-Dufresne is at EPFL and Swiss Finance Institute. Benjamin Junge is at Capital Fund Management. Anders B. Trolle is at HEC Paris and Copenhagen Business School. We thank Stefan Nagel (the Editor), two anonymous referees, Bruno Biais, Darrell Duffie, Thierry Foucault, Larry Glosten, Michael Johannes, René Kallestrup, Laurence Lescourret, Albert Menkveld, Ioanid Rosu, Grigory Vilkov, Søren Willemann, Hongjun Yan, Zhaodong Zhong, Alex Zhou, Haoxiang Zhu, and seminar participants at the Bank of England, BI Norwegian Business School, Boston University, the Commodity Futures Trading Commission, Cornerstone Research, Deutsche Bundesbank, EPFL, ESSEC, the European Central Bank, the Federal Reserve Bank of New York, the Federal Reserve Board, Frankfurt School of Finance & Management, HEC Paris, Lombard Odier, McGill University, Rutgers University, University of New South Wales, University of St. Gallen, the 12th Annual Central Bank Conference on Microstructure of Financial Markets, the 2016 Paris Finance Meeting, the 2016 SFI Research Days, the 2017 Chicago Financial Institutions Conference, the 2017 Fixed Income and Financial Institutions Conference, the 2017 Four Nations Cup, the Midwest Finance Association 2017 meeting, the American Finance Association 2018 meeting, the Northern Finance Association 2018 meeting, the 2018 FRIC conference, the 2018 NFI conference, the 2018 Paris Microstructure Forum, and the Society for Financial Econometrics 2018 conference for comments and suggestions. Collin-Dufresne acknowledges research support from the Swiss Finance Institute. Trolle acknowledges support from the Investissements d'Avenir Labex (ANR-11-IDEX-0003/Labex Ecodec/ANR-11-LABX-0047) and the Danish Finance Institute. The authors do not have any conflicts of interest as identified in The Journal of Finance disclosure policy.
Correspondence: Anders B. Trolle, HEC Paris, Finance Department, 1 Rue de la Libération, Yveline, Jouy-en-Josas, 78350, France; e-mail: trolle@hec.fr.
Search for more papers by this authorABSTRACT
Despite regulatory efforts to promote all-to-all trading, the post–Dodd-Frank index credit default swap market remains two-tiered. Transaction costs are higher for dealer-to-client than interdealer trades, but the difference is explained by the higher, largely permanent, price impact of client trades. Most interdealer trades are liquidity motivated and executed via low-cost, low-immediacy trading protocols. Dealer-to-client trades are nonanonymous; they almost always improve upon contemporaneous executable interdealer quotes, and dealers appear to price discriminate based on the perceived price impact of trades. Our results suggest that the market structure is a consequence of the characteristics of client trades: relatively infrequent, large, and differentially informed.
Supporting Information
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Appendix S1: Internet Appendix. |
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Replication code. |
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