Economic Policy Uncertainty, CDS Spreads, and CDS Liquidity Provision

Using a news-based index of economic policy uncertainty (EPU), we find that EPU is positively associated with credit default swap (CDS) spreads and negatively associated with the number of liquidity providers in the CDS market. A 10% increase in EPU leads to an 8.4% increase in CDS spreads and a 4.0% decrease in the number of liquidity providers. Furthermore, the effects of EPU are persistent and robust after controlling for macroeconomic variables. Our results are also robust to different econometric methodologies. Overall, our findings suggest that, when EPU is high, investors find credit protection more costly and difficult to purchase.

Keywords: Policy uncertainty, Credit default swap, Liquidity provision, Market depth

JEL Classification: E44, G10, G12, G18

Suggested Citation: Suggested Citation

Wang, Xinjie and Xu, Weike and Zhong, Zhaodong, Economic Policy Uncertainty, CDS Spreads, and CDS Liquidity Provision (October 23, 2018). Journal of Futures Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3042079 or http://dx.doi.org/10.2139/ssrn.3042079