| Abstract |
Using the transaction-level records accounting for the universe of the single-name credit default swap (CDS) contracts in Japan, we document whether and how (if any) the relative centrality of sellers to buyers, that proxies for their search ability and thus bargaining power, affects single-name CDS prices. First, our panel estimation, which comprehensively controls for the standard pricing factors considered in practice (e.g., entity’s risk, counterparty risk, notional amount, and maturity), suggests that CDS prices become higher as the relative centrality of sellers to buyers becomes higher. Second, such centrality premium becomes more apparent in the market with higher credit risk and further increases when the buyers attempt to unwind their short position. Given the non-negligible quantitative impacts of the relative centrality on CDS prices, we confirm that the bargaining power originating from search ability to large extent determines CDS prices. Third, deeper trade relations between sellers and buyers result in centrality discount (premium) in the market with higher (lower) credit risk. This result suggests the tradeoff between the cost of maintaining relationship in good periods and the benefit of securing cheap access to CDS in bad periods. |