IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Time-varying credit risk and liquidity premia in bond and CDS markets

  • Bühler, Wolfgang
  • Trapp, Monika
Registered author(s):

    We develop a reduced-form model that allows us to decompose bond spreads and CDS premia into a pure credit risk component, a pure liquidity component, and a component measuring the relation between credit risk and liquidity. CDS liquidity has important consequences for the bond credit risk and liquidity components. Besides the credit risk link, we document a liquidity link between the bond and the CDS market. Liquidity in both markets dries up as credit risk increases, and higher bond market liquidity leads to lower CDS market liquidity. Ignoring CDS liquidity results in partly negative liquidity premia, particularly when CDS liquidity is low.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: https://econstor.eu/bitstream/10419/41349/1/616612656.pdf
    Download Restriction: no

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 09-13.

    as
    in new window

    Length:
    Date of creation: 2009
    Date of revision:
    Handle: RePEc:zbw:cfrwps:0913
    Contact details of provider: Postal:
    0221 / 470 5607

    Phone: 0221 / 470 5607
    Fax: 0221 / 470 5179
    Web page: http://cfr-cologne.de/english/version06/html/home.php
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2006. "Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market," NBER Working Papers 12376, National Bureau of Economic Research, Inc.
    2. Menachem Brenner & Rafi Eldor & Shmuel Hauser, 1999. "The Price of Options Illiquidity," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-086, New York University, Leonard N. Stern School of Business-.
    3. Dimitri Vayanos, 2004. "Flight to Quality, Flight to Liquidity, and the Pricing of Risk," NBER Working Papers 10327, National Bureau of Economic Research, Inc.
    4. Jan Ericsson & Olivier Renault, 2006. "Liquidity and Credit Risk," Journal of Finance, American Finance Association, vol. 61(5), pages 2219-2250, October.
    5. Kwamie Dunbar, 2007. "US Corporate Default Swap Valuation: The Market Liquidity Hypothesis and Autonomous Credit Risk," Working papers 2007-08, University of Connecticut, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:zbw:cfrwps:0913. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.