Endogenous liquidity in credit derivatives

Jiaping Qiu and Fan Yu

Journal of Financial Economics, 2012, vol. 103, issue 3, 611-631

Abstract: We study the determination of liquidity provision in the single-name credit default swap (CDS) market as measured by the number of distinct dealers providing quotes. We find that liquidity is concentrated among large obligors and those near the investment-grade/speculative-grade cutoff. Consistent with endogenous liquidity provision by informed financial institutions, more liquidity is associated with obligors for which there is a greater information flow from the CDS market to the stock market ahead of major credit events. Furthermore, the level of information heterogeneity plays an important role in how liquidity provision responds to transaction demand and how liquidity is priced into the CDS premium.

Keywords: Credit derivatives; Dealers; Liquidity provision; Informed trading (search for similar items in EconPapers)
JEL-codes: D82 G12 G13 G14 G28 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (77)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:103:y:2012:i:3:p:611-631

DOI: 10.1016/j.jfineco.2011.10.010

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