The liquidity premium in CDS transaction prices: Do frictions matter?

Monika Gehde-Trapp, Yalin Gündüz and Julia Nasev

Journal of Banking & Finance, 2015, vol. 61, issue C, 184-205

Abstract: Based on individual CDS transactions cleared by the Depository Trust & Clearing Corporation, we show that illiquidity strongly affects credit default swap premiums. We identify the following effects: first, transaction direction affects prices, as buy (sell) orders lead to premium increases (decreases). Second, larger transactions have a higher price impact. This finding stands in stark contrast to corporate bond markets. Third, traders charge higher premiums as a price for liquidity provision, not as compensation for asymmetric information. Fourth, buy-side investors pay significantly higher prices than dealers for demanding liquidity. Finally, inventory risk seems to matter little in explaining liquidity premiums.

Keywords: CDS; Illiquidity; Temporary price impact; Market power; Immediacy; DTCC (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:61:y:2015:i:c:p:184-205

DOI: 10.1016/j.jbankfin.2015.08.024

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