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Demand-supply imbalances in the credit default swap market: empirical evidence

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  • Lidija Lovreta

Abstract

This paper empirically examines demand-supply imbalances in the credit default swap (CDS) market and provides evidence of its effect on the CDS spread dynamics. Analysis is conducted on a large and homogenous data set of the 92 non-financial European companies with the most quoted Euro-denominated CDS contracts during the 2002-2008 period. Main findings indicate that short-term CDS price movements, not related to fundamentals, are positively affected by demand-supply imbalances when protection buyers outstrip protection sellers. Results illustrate that CDS spreads reflect not only the price of credit protection, but also a liquidity premium for the anticipated cost of unwinding the position of protection sellers, especially during stress periods.

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  • Lidija Lovreta, 2016. "Demand-supply imbalances in the credit default swap market: empirical evidence," The European Journal of Finance, Taylor & Francis Journals, vol. 22(1), pages 28-58, January.
    • Handle: RePEc:taf:eurjfi:v:22:y:2016:i:1:p:28-58
    DOI: 10.1080/1351847X.2014.935868
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