Credit Default Swap is speculative? : The case study for Japanese consumer finance companies

CDS markets have been expanded significantly in this past ten years. CDS has more speculative side than traditional financial bonds, because of the transaction property. In Greece Financial Crisis, CDS trades of government bond had been told to have the adverse effect on government bond market pricing. By the case study for Japanese consumer finance companies and electric power companies, we examine what character CDS trade has? In existing statistical studies, no correlation have recognized between CDS and corporate bond in Japan. But we discovered the perfect arbitrage in Promise on the date when Takefuji was bankrupted. We think the case study is so important. And, in the case of electric power companies, we find out the stronger correlation between CDS and stock than between CDS and bond. After the 2011 Great East Japan Earthquake, this relation becomes so salient. In usual condition, many Japanese bond holders have not used CDS for risk hedging and foreign investors mainly have played in CDS market for trading purpose. Thus, these yield the interesting fact that the former relation is more similar than the latter. Finally we check the change of CDS spread curve of consumer finance companies after 2005. The spread curves of Acorn and Promise, which are affiliated with their bank, are positive slope and so stable. However, the spread curves of Aiful and Takefuji have become negative and unstable after July, 2008, when the global financial crises began to grow intense. This seems to imply foreign Hedge funds speculative trades for Aiful and Takefuji. Because CDS trades tends to be speculative and make financial markets more unstable, we should pay attention to the possibility of systemic risk. We need to study the CDS and its regulation.