Demand-supply imbalances in the credit default swap market: empirical evidence

Lidija Lovreta

The European Journal of Finance, 2016, vol. 22, issue 1, 28-58

Abstract: This paper empirically examines demand-supply imbalances in the credit default swap (CDS) market and provides evidence of its effect on the CDS spread dynamics. Analysis is conducted on a large and homogenous data set of the 92 non-financial European companies with the most quoted Euro-denominated CDS contracts during the 2002-2008 period. Main findings indicate that short-term CDS price movements, not related to fundamentals, are positively affected by demand-supply imbalances when protection buyers outstrip protection sellers. Results illustrate that CDS spreads reflect not only the price of credit protection, but also a liquidity premium for the anticipated cost of unwinding the position of protection sellers, especially during stress periods.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:22:y:2016:i:1:p:28-58

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DOI: 10.1080/1351847X.2014.935868

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