Determinants of CDS Trading on Major Banks

This paper empirically investigates determinants of the outstanding net notional amount of credit default swaps (CDSs) contracts written on banks. We extend and complement the previous literature dealing with CDS trading by analyzing a comprehensive set of CDS tradingspecific, bank-fundamental, macroeconomic and bank-institutional determinants. We find that risk hedging clearly dominates an investor’s speculation and arbitrage motive, while the latter, however, exhibits the strongest impact on the outstanding net notional amount of bank CDSs. Furthermore, being classified as a G-SIB, being a constituent of the main CDS index and the equity trading volume may significantly explain changes in the outstanding CDS net notional on banks. The analysis at hand provides important implications for both academics and practitioners, since understanding the trading motives of bank CDS investors provides a deeper insight into the opaque CDS market.