The Effects of Liquidity on the Price Discovery Process in Credit Derivatives Markets in Times of Financial Distress

54 Pages Posted: 12 Jun 2019

See all articles by Juan Ignacio Peña

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Juan Romo

Universidad Carlos III de Madrid

Sergio Mayordomo

Banco de España

Date Written: 2010

Abstract

This paper analyses the role of liquidity in the price discovery process. Specifically, it focuses on the credit derivatives markets in the context of the subprime crisis. It presents a theoretical price discovery model for the ASP, bond and CDS markets and then it tests the model with data from 2005 to 2009 on Euro-denominated non-financial firms. The empirical results show that the ASP market clearly leads the bond market in the price discovery process in all cases, while the leadership between ASPs and CDSs is very sensitive to the appearance of the subprime crisis. Before the crisis the CDS market leads the ASP market but during the crisis the ASP market leads the CDS market.

Keywords: Price Discovery, VECM, Credit Derivatives, Credit Spreads

JEL Classification: C32, C51, G13, G14

Suggested Citation

Peña, Juan Ignacio and Romo, Juan and Mayordomo, Sergio, The Effects of Liquidity on the Price Discovery Process in Credit Derivatives Markets in Times of Financial Distress (2010). CNMV Working Paper No. 41 (2010), Available at SSRN: https://ssrn.com/abstract=3400574 or http://dx.doi.org/10.2139/ssrn.3400574

Juan Ignacio Peña (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

Juan Romo

Universidad Carlos III de Madrid ( email )

E-28903 Getafe (Madrid)
Spain

Sergio Mayordomo

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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