Hedging Credit: Equity Liquidity Matters

13 Pages Posted: 11 Nov 2007 Last revised: 25 Sep 2015

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Paul Hanouna

Villanova University - School of Business

Date Written: October 9, 2007

Abstract

Credit default swap (CDS) spreads are directly related to equity market liquidity in the Merton (1974) model via hedging. This relationship is monotone increasing when credit quality worsens. Empirical tests confirm this relationship. We theorize and confirm this new channel by means of which liquidity costs are embedded in CDS spreads.

Keywords: Credit Default Swaps, Liquidity

JEL Classification: G0, G1

Suggested Citation

Das, Sanjiv Ranjan and Hanouna, Paul E., Hedging Credit: Equity Liquidity Matters (October 9, 2007). Journal of Financial Intermediation, Vol. 18, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=1028735 or http://dx.doi.org/10.2139/ssrn.1028735

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

Paul E. Hanouna (Contact Author)

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

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