Funding Liquidity Shocks in a Quasi-Experiment: Evidence from the CDS Big Bang

45 Pages Posted: 12 Feb 2016 Last revised: 11 May 2020

See all articles by Xinjie Wang

Xinjie Wang

Southern University of Science and Technology

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Hongjun Yan

DePaul University

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: January 12, 2020

Abstract

We use the advent of new credit default swap (CDS) trading conventions in April 2009—the CDS Big Bang—to study how a shock to funding liquidity impacts market liquidity. After the Big Bang, traders are required to pay upfront fees to execute CDS transactions, with the size of the fees depending on the level of CDS spreads. While CDS bid-ask spreads decline in aggregate after the Big Bang, they do so less for contracts that require larger fees. Furthermore, the funding effect is stronger for smaller and riskier firms and for noncentrally cleared contracts. The effect also becomes stronger after Deutsche Bank’s exit.

Keywords: funding liquidity, arbitrage, basis, CDS Big Bang, standardization, central clearing

JEL Classification: G11, G12, G13, G14, G18, G28

Suggested Citation

Wang, Xinjie and Wu, Yangru and Yan, Hongjun and Zhong, Zhaodong, Funding Liquidity Shocks in a Quasi-Experiment: Evidence from the CDS Big Bang (January 12, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2730877 or http://dx.doi.org/10.2139/ssrn.2730877

Xinjie Wang

Southern University of Science and Technology ( email )

1088 Xueyuan Blvd
Xili, Nanshan District
Shenzhen, Guangdong 518055
China

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

Hongjun Yan (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/hongjunyanhomepage/

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Department of Finance, Rutgers Business School
100 Rockafeller Road
Piscataway, NJ 08854
United States

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