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The Determinants of CDS Bid-ask Spreads

Author

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  • Marcin Wojtowicz

    (VU University Amsterdam, the Netherlands)

Abstract

We investigate the determinants of bid-ask spreads on corporate credit default swaps (CDSs). We find that proxies for dealer inventory costs such as variability of CDS premia and CDS trading volume explain as much as 80% of variation in CDS bid-ask spreads. We also analyze the influence of variables capturing systematic risk of reference entities, market-implied volatility, dealer funding costs and competition between dealers. Several of these variables are significant, but their explanatory power is moderate. Finally, we demonstrate that CDS bid-ask spreads do not widen preceding earnings announcement surprises, which suggests that private information does not hinder CDS liquidity.

Suggested Citation

  • Marcin Wojtowicz, 2014. "The Determinants of CDS Bid-ask Spreads," Tinbergen Institute Discussion Papers 14-138/IV/ DSF82, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20140138
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit default swaps; Liquidity; Bid-ask spreads; Components of bid-ask spreads;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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