Economic Policy Uncertainty, CDS Spreads, and CDS Liquidity Provision
Journal of Futures Markets, Forthcoming
45 Pages Posted: 26 Sep 2017 Last revised: 8 Jul 2020
Date Written: October 23, 2018
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