Standardization, Transparency Initiatives and Liquidity in the CDS Market

68 Pages Posted: 18 Jan 2015 Last revised: 2 Feb 2022

Date Written: January 19, 2022

Abstract

We investigate liquidity changes in the credit default swap (CDS) market around two events that increased market transparency and standardization during the Great Financial Crisis: the dissemination of CDS positions starting in November 2008, and the implementation of the Small Bang in July 2009. We build an econometric model based on bid and ask quotes to measure liquidity in thinly traded CDSs. We find that, after the release of CDS positions, the market-wide deterioration in liquidity is less important for banks, consistent with information revelation alleviating systemic risk uncertainty. The Small Bang also improved liquidity, particularly for more illiquid CDSs.

Keywords: Credit Default Swap, Liquidity, Transparency, CDS Volatility, Counterparty Risk

JEL Classification: C51, G14, G18

Suggested Citation

Daures, Laurence and Fulop, Andras, Standardization, Transparency Initiatives and Liquidity in the CDS Market (January 19, 2022). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2551169 or http://dx.doi.org/10.2139/ssrn.2551169

Laurence Daures (Contact Author)

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX
France
+33 1 34 43 33 62 (Phone)
+33 1 34 43 32 12 (Fax)

Andras Fulop

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

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