Excess liquidity premia of single-name CDS vs iTraxx/CDX spreads: 2007-2017

Mariya Gubareva ()

Studies in Economics and Finance, 2019, vol. 37, issue 1, 18-27

Abstract: Purpose - The aim of this research is twofold. First, we study average levels of liquidity for long-run through-the-cycle periods, which potentially allow eliminating procyclicality from risk parameters used for expected credit-loss calculations. Second, we investigate to what extent the relative illiquidity of individual credit default swap (CDS) contracts affects their spreads in comparison with the respective CDS indices. Design/methodology/approach - Based on the iTraxx Europe CDS index covering European firms and the CDX North America CDS index covering US firms, as well as on individual CDS transactions involving the reference entities constituting these two benchmark indices, we investigate the excess liquidity premia in spreads of the single-name CDS contracts over the spreads of the iTraxx and CDX indices over 2007-2017. Findings - First, single-name CDS excess liquidity premia depend on CDS contract maturity. Second, the long-run average spread of a benchmark index may stay as low as three-fourths of the respective long-run average of the mean of the single-name CDS spreads, meaning that the excess liquidity premium may be as high as one-fourth of the firm-specific CDS spread. Third, the term structure of the excess liquidity differs between the Europe and North America geographies. Fourth, on average, the excess liquidity premia in the single-name CDS spreads over the respective CDS indices diminish with increasing maturities of CDS contracts. Originality/value - No previous research addresses differences between the liquidity component in a benchmark CDS index spreads and the mean spread averaged across the constituents of the index. Our work fills this gap.

Keywords: CDX index; Excess liquidity; iTraxx index; Liquidity premium; Single-name CDS; G01; G10; G11; G15; G32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-02-2019-0083

DOI: 10.1108/SEF-02-2019-0083

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