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Liquidity and CDS premiums on European companies around the Subprime crisis

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  • LESPLINGART, Clothilde
  • MAJOIS, Christophe
  • PETITJEAN, Mikael

Abstract

This paper sheds new light on the liquidity dynamics of the credit default swaps (CDS) market in Europe around the Subprime crisis. Based on an original dataset of 94 European companies from 2005 to 2009, we use a panel regression analysis to study the relationship between CDS premiums and liquidity. We measure the level of liquidity, look at liquidity risk, and study the liquidity spillovers from the bond and equity markets to the CDS market. We show that the effect of liquidity on CDS premiums is dominated by the influence of worsening credit conditions and deteriorating investors’ expectations about default risk. Controlling for credit risk, we also find that liquidity risk is priced in the European CDS market and that liquidity spillovers from the bond market matter in determining CDS premiums. Copyright Springer Science+Business Media, LLC 2012
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Suggested Citation

  • LESPLINGART, Clothilde & MAJOIS, Christophe & PETITJEAN, Mikael, 2012. "Liquidity and CDS premiums on European companies around the Subprime crisis," CORE Discussion Papers RP 2440, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvrp:2440 Note: In : Review of Derivatives Research, 15(3), 257-281, 2012
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    File URL: http://dx.doi.org/10.1007/s11147-012-9076-y
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    References listed on IDEAS

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    1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
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    4. Didier Cossin & Tomas Hricko & Daniel Aunon-Nerin & Zhijiang Huang, 2002. "Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data: Is Fixed-Income Markets’ Information Suffcient to Evaluate Credit Risk?," FAME Research Paper Series rp65, International Center for Financial Asset Management and Engineering.
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    Cited by:

    1. Evangelos Benos & Rodney J. Garratt & Peter Zimmerman, 2014. "The Role of Counterparty Risk in CHAPS Following the Collapse of Lehman Brothers," International Journal of Central Banking, International Journal of Central Banking, vol. 10(4), pages 143-172, December.
    2. Agata Kliber, 2016. "The leverage effect puzzle: the case of European sovereign credit default swap market," Review of Derivatives Research, Springer, vol. 19(3), pages 217-235, October.
    3. Christian Meine & Hendrik Supper & Gregor Weiß, 2015. "Do CDS spreads move with commonality in liquidity?," Review of Derivatives Research, Springer, vol. 18(3), pages 225-261, October.

    More about this item

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G1 - Financial Economics - - General Financial Markets

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