Endogenous Liquidity in Credit Derivatives

47 Pages Posted: 15 Mar 2011  

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: March 14, 2011

Abstract

We study the determination of liquidity provision as measured by the number of distinct dealers providing quotes in the single-name credit default swap (CDS) market. Cross-sectionally, liquidity is concentrated among large obligors and those near the investment-grade/speculative-grade cutoff. Consistent with endogenous liquidity provision by informed financial institutions, more liquidity is associated with obligors for which there is a greater information flow from the CDS market to the stock market ahead of major credit events. Furthermore, the level of information heterogeneity plays a prominent role in how liquidity provision responds to transaction demand and how liquidity is priced into the CDS premium.

Suggested Citation

Qiu, Jiaping and Yu, Fan, Endogenous Liquidity in Credit Derivatives (March 14, 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1785750 or http://dx.doi.org/10.2139/ssrn.1785750

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Fan Yu (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

Paper statistics

Downloads
385
Rank
61,029
Abstract Views
1,698