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 About Donald

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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An Introduction to Derivative Securities, Financial Markets, and Risk ManagementAdvanced Financial Risk Management, 2nd ed.

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Kamakura Blog


Trading volume in the bond and credit default swap markets, particularly the sovereign credit default swap market, is one of the key drivers of profit for major dealers like Bank of America (BAC), Barclays Bank PLC, BNP Paribas (BNPZY), Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), HSBC Holdings (HSBC), JPMorgan Chase (JPM), Morgan Stanley (MS), The Royal Bank of Scotland Group PLC (RBS), and UBS AG (UBS). This update adds some details to the Wall Street Journal study “Where did Europe’s Sovereign CDS Trading Go?” which analyzes the European Commission’s ban on the short sales of sovereign credit default swaps.

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The near-bankruptcy of Puerto Rico and the actual bankruptcy of Detroit brings even more pressure on municipal bond investors and related exchange-traded funds like (HYD) (NUV) (PML) (PZA) (IIM) (NIO) (VMO) specializing in municipal bonds to heighten risk management and to hedge where appropriate. One potential tool in that regard is the single name credit default swap market, which is featured almost constantly in discussions of municipal entity credit risk.

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The author wishes to thank Prof. Robert Jarrow for many years of helpful conversations on this important topic. We thank the staff of Kamakura Risk Information Services for the 100,000 scenarios used in this study.

We use 100,000 scenarios for the U.S. Treasury (TLT) yield curve to examine the outlook for Treasuries and the magnitude of the term premium (or risk premium) above and beyond expected rate levels that is embedded in the yield curve. The U.S. Treasury yield curve from which simulations are initiated is the July 10, 2015 yield curve as reported by the U.S. Department of the Treasury.

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In this note, we focus on credit default swap trading volume in 1,056 non-bank corporate reference names for the 259 weeks from the week ending July 16, 2010 through the week ending June 26, 2015. The highest non-dealer trading volumes are found on “story credits” like J. C. Penney (JCP), Caesars Entertainment Operating Company, Inc. (CZR), Eastman Kodak Company (KODK), Arcelormittal (MT), and RadioShack Corporation (RSH) (RSHCQ).

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We previously analyzed the trading volume of credit default swaps on international bank reference names for the 233 weeks ending December 26, 2014. This note updates that analysis for the 259 weeks ended June 26, 2015. Of the 1,256 reference names on which credit default swaps were traded during this period, 114 were “international banks,” which we define as a non-U.S. financial institution. Out of the 216,056 observations reported by the Depository Trust & Clearing Corporation, there were 17,799 weekly observations in which an international bank had at least 1 credit default swap traded on its name.

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