Credit Default Swap Spreads: Funding Liquidity Matters!

Essex Finance Centre Working Paper Series No. 23321, University of Essex, Essex Business School

40 Pages Posted: 28 Nov 2018

See all articles by Chiara Banti

Chiara Banti

University of Essex

Neil Kellard

University of Essex - Essex Business School

Radu-Dragomir Manac

University of Essex

Date Written: October 18, 2018

Abstract

This paper explores the relationship between funding liquidity and credit default swap (CDS) spreads, evidencing the effects of the regulatory changes brought about by the introduction of the CDS Small Bang reforms for CDS contracts on European reference entities in June 2009. Using panel estimations, this study provides evidence that a tightening of funding liquidity increases CDS spreads, an effect which is three times larger in magnitude for high-CDS entities compared to low-CDS firms. This relationship increases in magnitude and significance after the implementation of the CDS Small Bang reforms which introduced fixed coupons for trading CDSs, leading to the exchange of upfront fees between CDS contract parties.

Keywords: CDS Spreads, CDS Small Bang, Funding Liquidity

JEL Classification: G01, G12, G32

Suggested Citation

Banti, Chiara and Kellard, Neil and Manac, Radu-Dragomir, Credit Default Swap Spreads: Funding Liquidity Matters! (October 18, 2018). Essex Finance Centre Working Paper Series No. 23321, University of Essex, Essex Business School. Available at SSRN: https://ssrn.com/abstract=3277366 or http://dx.doi.org/10.2139/ssrn.3277366

Chiara Banti

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Neil Kellard

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44-1206-87-4153 (Phone)

Radu-Dragomir Manac (Contact Author)

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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