Liquidity premia in CDS markets

  • We develop a state-space model to decompose bid and ask quotes of CDS into two components, fair default premium and liquidity premium. This approach gives a better estimate of the default premium than mid quotes, and it allows to disentangle and compare the liquidity premium earned by the protection buyer and the protection seller. In contrast to other studies, our model is structurally much simpler, while it also allows for correlation between liquidity and default premia, as supported by empirical evidence. The model is implemented and applied to a large data set of 118 CDS for a period ranging from 2004 to 2010. The model-generated output variables are analyzed in a difference-in-difference framework to determine how the default premium, as well as the liquidity premium of protection buyers and sellers, evolved during different periods of the financial crisis and to which extent they differ for financial institutions compared to non-financials.

Download full text files

Export metadata

Additional Services

Share in Twitter Search Google Scholar
Metadaten
Author:Christel Merlin Kuate Kamga, Christian Wilde
URN:urn:nbn:de:hebis:30:3-437450
URL:https://ssrn.com/abstract=3005276
Parent Title (English):SAFE working paper series ; No. 173
Series (Serial Number):SAFE working paper (173)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2017
Year of first Publication:2017
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2017/08/14
Tag:CDS; liquidity
Issue:July 14, 2017
Page Number:51
HeBIS-PPN:416394876
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C2 Single Equation Models; Single Variables / C22 Time-Series Models; Dynamic Quantile Regressions (Updated!)
Sammlungen:Universit├Ątspublikationen
Licence (German):License LogoDeutsches Urheberrecht