Funding Liquidity Shocks in a Quasi-Experiment: Evidence from the CDS Big Bang
45 Pages Posted: 12 Feb 2016 Last revised: 11 May 2020
Date Written: January 12, 2020
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: Suggested Citation