Funding liquidity shocks in a quasi-experiment: Evidence from the CDS Big Bang

Xinjie Wang, Yangru Wu (), Hongjun Yan and Zhaodong Zhong

Journal of Financial Economics, 2021, vol. 139, issue 2, 545-560

Abstract: We use the advent of new credit default swap (CDS) trading conventions in April 2009—the CDS Big Bang—to study how a shock to funding liquidity impacts market liquidity. After the Big Bang, traders are required to pay upfront fees to execute CDS transactions, with the size of the fees depending on the level of CDS spreads. While CDS bid-ask spreads decline in aggregate after the Big Bang, they do so less for contracts that require larger fees. Furthermore, the funding effect is stronger for smaller and riskier firms and for noncentrally cleared contracts. The effect also becomes stronger after Deutsche Bank's exit.

Keywords: Funding liquidity; CDS Big Bang; CDS Small Bang; Standardization; Central clearing (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 G14 G18 G28 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:139:y:2021:i:2:p:545-560

DOI: 10.1016/j.jfineco.2020.08.004

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