Do CDS Spreads Move with Commonality in Liquidity?

47 Pages Posted: 9 Apr 2015

See all articles by Christian Meine

Christian Meine

Ruhr University of Bochum

Hendrik Supper

University of Dortmund - Department of Business

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Date Written: April 8, 2015

Abstract

We show that commonality in liquidity is priced in both the cross-section and time-series of credit default swap (CDS) premia. Protection buyers earn a statistically significant and economically important discount for bearing the risk of individual CDS illiquidity co-moving with CDS market illiquidity. The pricing of commonality in CDS liquidity is different for calm and crisis periods as we find liquidity risk to be a priced factor in CDS spreads only during the recent financial crisis. Additionally, we find evidence that liquidity seems to be more important for the pricing of CDS than fundamentals from structural models of default risk.

Keywords: Credit default swaps, liquidity commonality, liquidity risk

JEL Classification: G12, G01

Suggested Citation

Meine, Christian and Supper, Hendrik and Weiss, Gregor N. F., Do CDS Spreads Move with Commonality in Liquidity? (April 8, 2015). Review of Derivatives Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2591855

Christian Meine

Ruhr University of Bochum ( email )

Universitätsstraße 150
Bochum, NRW 44801
Germany

Hendrik Supper

University of Dortmund - Department of Business ( email )

Otto-Hahn-Str. 6a
Dortmund, 44227
Germany

Gregor N. F. Weiss (Contact Author)

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
97
Abstract Views
987
Rank
486,956
PlumX Metrics