Proxy war: Shrinking CDS market leaves CVA and DVA on shaky ground

Runaway adjustments

dva1

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In the space of three trading days, starting on November 30, 2012, the credit default swap (CDS) spread for Natixis fell 7.4%. During that period, a single trade was executed. In the three prior weeks, the CDS had not traded at all.

That shows how jumpy and illiquid the CDS market can be, even for relatively large banks, and the same kind of results pop up time and again when trade frequencies – compiled by risk software vendor Kamakura – are overlaid wit

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