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Credit Default Swap and Liquidity

Author

Listed:
  • Khaldoun Maddallah Al-Qaisi

    (Faculty of Business, Amman Arab University, Jordan,)

  • Rafat Mohd Soudki Al-Batayneh

    (Department of Finance, Faculty of Business, Amman Arab University, Jordan)

Abstract

The recent global economic downturn that erupted in the mid 2007 saw an increase of the Credit Default Swaps (CDS) by hundred basis points and severe liquidity crunch in the financial sector of the United States. The recession phase highlighted the importance of the liquidity for the investors and underlined the importance of understanding the connection between the liquidity of the market and the credit markets. In depth, this study tries to understand the relation between the liquidity risk in the CDS market and the credit risk. Along the same line of this study, a study conducted on the different Swiss and German companies revealed that credit risk is not the direct originator of the liquidity risk, but it created by a negative credit shock. In addition, this paper focuses on the causes that intensified the global crisis of (2007) as well as the macro-prudential policies are highlighted that will prevent a similar type of crisis in the future.

Suggested Citation

  • Khaldoun Maddallah Al-Qaisi & Rafat Mohd Soudki Al-Batayneh, 2017. "Credit Default Swap and Liquidity," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 697-700.
    • Handle: RePEc:eco:journ1:2017-02-91
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    References listed on IDEAS

    as
    1. John Y. Campbell & Glen B. Taksler, 2003. "Equity Volatility and Corporate Bond Yields," Journal of Finance, American Finance Association, vol. 58(6), pages 2321-2350, December.
    2. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    3. Breitenfellner, Bastian & Wagner, Niklas, 2012. "Explaining aggregate credit default swap spreads," International Review of Financial Analysis, Elsevier, vol. 22(C), pages 18-29.
    4. Hertrich, Markus, 2015. "Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets," MPRA Paper 67837, University Library of Munich, Germany.
    5. Bolton, Patrick & Oehmke, Martin, 2013. "Strategic conduct in credit derivative markets," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 652-658.
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    Cited by:

    1. amri amamou, souhir & hellara, slaheddine, 2021. "The dynamic relationship between the sovereign CDS market and the Eurozone sovereign bond market (classified by maturity): Contagion or Spillovers?," MPRA Paper 109038, University Library of Munich, Germany.

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    More about this item

    Keywords

    Credit Risk; Liquidity; Financial Crisis;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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