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

See all articles by Xinjie Wang

Xinjie Wang

Southern University of Science and Technology

Weike Xu

Clemson University - Department of Finance

Zhaodong Zhong

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

Date Written: October 23, 2018

Abstract

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

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

Xinjie Wang (Contact Author)

Southern University of Science and Technology ( email )

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

Weike Xu

Clemson University - Department of Finance ( email )

425 Sirrine Hall
Clemson, SC 29634
United States

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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