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Endogenous liquidity in credit derivatives

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  • Qiu, Jiaping
  • Yu, Fan
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    Abstract

    We study the determination of liquidity provision in the single-name credit default swap (CDS) market as measured by the number of distinct dealers providing quotes. We find that liquidity is concentrated among large obligors and those near the investment-grade/speculative-grade cutoff. Consistent with endogenous liquidity provision by informed financial institutions, more liquidity is associated with obligors for which there is a greater information flow from the CDS market to the stock market ahead of major credit events. Furthermore, the level of information heterogeneity plays an important role in how liquidity provision responds to transaction demand and how liquidity is priced into the CDS premium.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 103 (2012)
    Issue (Month): 3 ()
    Pages: 611-631

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    Handle: RePEc:eee:jfinec:v:103:y:2012:i:3:p:611-631

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Credit derivatives; Dealers; Liquidity provision; Informed trading;

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    Cited by:
    1. Joshua Slive & Jonathan Witmer & Elizabeth Woodman, 2012. "Liquidity and Central Clearing: Evidence from the CDS Market," Working Papers 12-38, Bank of Canada.

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