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Standardization, transparency initiatives, and liquidity in the CDS market

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  • Daures-Lescourret, Laurence
  • Fulop, Andras

Abstract

We investigate liquidity changes in the credit default swap (CDS) market around two events that increased market transparency and standardization during the Great Financial Crisis: the dissemination of CDS positions starting in November 2008, and the implementation of the Small Bang in July 2009. We build an econometric model based on bid and ask quotes to measure liquidity in thinly traded CDSs. We find that, after the release of CDS positions, the market-wide deterioration in liquidity is less important for banks, consistent with information revelation alleviating systemic risk uncertainty. The Small Bang also improved liquidity, particularly for more illiquid CDSs.

Suggested Citation

  • Daures-Lescourret, Laurence & Fulop, Andras, 2022. "Standardization, transparency initiatives, and liquidity in the CDS market," Journal of Financial Markets, Elsevier, vol. 59(PA).
    • Handle: RePEc:eee:finmar:v:59:y:2022:i:pa:s1386418122000106
    DOI: 10.1016/j.finmar.2022.100718
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    More about this item

    Keywords

    Credit default swap; Liquidity; Transparency; Small bang; Counterparty risk;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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