The Impact of Liquidity on Senior Credit Spreads During the Subprime Crisis

65 Pages Posted: 30 Mar 2013 Last revised: 8 Jul 2013

See all articles by Miriam Marra

Miriam Marra

University of Reading - ICMA Centre

Date Written: May 23, 2013


This paper examines the effects of liquidity during the 2007-09 crisis, focussing on the senior tranche of the CDX.NA.IG Index and on Moody's AAA Corporate Bond Index. The aim is to understand whether these senior credit indices were discounted below fair value and to what extent this discount reflects a lack of depth in the relevant markets, scarcity of risk-capital, and liquidity preference exhibited by investors. Using cointegration analysis, the paper shows that during the crisis lower market and funding liquidity and higher investors' risk-aversion are important drivers of the increase in the spread of triple-A structured securities, while they are less significant to explain the spread of a portfolio of unstructured credits. Looking at the experience of the subprime crisis, the study explores the pitfalls of securitization when the conditions under which it can work properly (transparency and tradability) suddenly disappear; leaving investors highly exposed to systemic risk factors.

Keywords: Credit Default Swap Index, Structural Model, Crisis, Market Liquidity, Funding Liquidity, Systemic Risk

JEL Classification: G01, G10, G12, G13

Suggested Citation

Marra, Miriam, The Impact of Liquidity on Senior Credit Spreads During the Subprime Crisis (May 23, 2013). ; Systemic Risk: Liquidity Risk, Governance and Financial Stability. Available at SSRN: or

Miriam Marra (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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