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

57 Pages Posted: 12 Feb 2016 Last revised: 26 Oct 2018

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: October 23, 2018

Abstract

A major change in trading conventions in April 2009, the so-called “CDS Big Bang,” induces upfront fees for trading North American CDSs. Exploiting this quasi-experiment, we provide evidence that upfront fees have a differential effect on CDS bid-ask spreads across CDS premiums. Furthermore, the funding effect is stronger for CDS contracts on smaller and riskier firms, contracts with longer maturities, and non-centrally-cleared contracts. The effect also becomes stronger after Deutsche Bank exits the CDS market. Finally, we find similar results using European CDSs. Our experimental setting offers new economic insights on the quantification and mechanism of the funding liquidity effect.

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 (October 23, 2018). 29th Australasian Finance and Banking Conference 2016. 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 )

No 1088, xueyuan Rd.
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/view/hongjunyan

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

Register to save articles to
your library

Register

Paper statistics

Downloads
267
Abstract Views
3,744
rank
112,211
PlumX Metrics