Hedging with Credit Derivatives in Response to Operational Risk in Supply Chain Hierarchical

In this paper, using newly available CDS positions data compiled from DTCC and the supply chain hierarchical position obtained from networking methodology, we examine whether and how investors can use CDS contracts to manage the heightened operational risk due to upstream supply chain hierarchical position. We find that further upstream position within supply chain network is associated with more CDS trading positions. The positive relation holds up to different proxies for CDS open positions and model specifications, and moreover, it is more pronounced for firms with poor information environment. Our results suggest that investors appear to employ CDS contracts to actively hedge against the reference entities' operational risk in supply chain