Time-varying credit risk and liquidity premia in bond and CDS markets
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.
|Date of creation:||2009|
|Date of revision:|
|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
More information through EDIRC
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.:
- 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.
- Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 925-957, March.
- 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-.
- Dimitri Vayanos, 2004.
"Flight to Quality, Flight to Liquidity, and the Pricing of Risk,"
NBER Working Papers
10327, National Bureau of Economic Research, Inc.
- Dimitri Vayanos, 2004. "Flight to quality, flight to liquidity, and the pricing of risk," LSE Research Online Documents on Economics 456, London School of Economics and Political Science, LSE Library.
- Jan Ericsson & Olivier Renault, 2006.
"Liquidity and Credit Risk,"
Journal of Finance,
American Finance Association, vol. 61(5), pages 2219-2250, October.
- Kwamie Dunbar, 2007.
"US Corporate Default Swap Valuation: The Market Liquidity Hypothesis and Autonomous Credit Risk,"
2007-08, University of Connecticut, Department of Economics.
- Kwamie Dunbar, 2008. "US corporate default swap valuation: the market liquidity hypothesis and autonomous credit risk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 321-334.
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 references are entirely missing, you can add them using this form.