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An Analysis of CDS Market Liquidity by the Hawkes Process

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  • Masahiko Egami
  • Yasuyuki Kato
  • Tomochika Sawaki
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    Abstract

    We study the credit default swap (CDS) markets in the U.S. and Japan, focusing on bid-ask spreads which are closely related to the liquidity of the markets. Since bid-ask spreads dramatically surged during the financial crisis (2008-2009) and the market became very illiquid, it is crucially important to investigate how bid-ask spreads fluctuate. In this paper, not only do we make dynamic analysis of the bid-ask spreads in both countries but propose a model to predict bid-ask spreads via the self-exciting intensity process (the Hawkes process).

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    File URL: http://www.econ.kyoto-u.ac.jp/projectcenter/Paper/e-13-001.pdf
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    Bibliographic Info

    Paper provided by Graduate School of Economics Project Center, Kyoto University in its series Discussion papers with number e-13-001.

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    Length: 35 pages
    Date of creation: Jun 2013
    Date of revision:
    Handle: RePEc:kue:dpaper:e-13-001

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    Related research

    Keywords: CDS contract; liquidity; bid-ask spread; the Hawkes process; self-exciting processes; financial crisis; credit risk;

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    1. Acharya, Viral V & Johnson, Tim, 2005. "Insider Trading in Credit Derivatives," CEPR Discussion Papers 5180, C.E.P.R. Discussion Papers.
    2. Jan Ericsson & Olivier Renault, 2006. "Liquidity and Credit Risk," Journal of Finance, American Finance Association, vol. 61(5), pages 2219-2250, October.
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