Estimation of CCP Premium During the Financial Crisis of 2008 : Evidence from Japanese Government Bond Market

Taking advantage of the physical settlement of Japanese government bond (JGB) futures, this paper firstly evaluates the role of central counterparties (CCPs) in the over-the-counter market during the 2008-2009 financial crisis. Our result shows that the special premium on the settlements through CCPs clearly emerged only during the crisis and is significantly related to physical settlements through CCPs. To identify the premium, we compare 7- and 6.75-year JGBs, which generate almost the same cash flow except the linkage to CCPs through JGB futures. Our evidence strongly supports the recent financial regulation reforms which mitigate the counterparty risk through CCPs