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The Effects of Liquidity on the Price Discovery Process in Credit Derivatives Markets in Times of Financial Distress

Sergio Mayordomo (), Juan Ignacio Peña and Juan Romo

No CNMV Working Papers no. 41. 2010, CNMV Working Papers from CNMV- Spanish Securities Markets Commission - Research and Statistics Department

Abstract: CONTENTS: This paper analyses the role of liquidity in the price discovery process. Specifically, it focuses on the credit derivatives markets in the context of the subprime crisis. It presents a theoretical price discovery model for the ASP, bond and CDS markets and then it tests the model with data from 2005 to 2009 on Euro-denominated non-financial firms. The empirical results show that the ASP market clearly leads the bond market in the price discovery process in all cases, while the leadership between ASPs and CDSs is very sensitive to the appearence of the subprime crisis. Before the crisis the CDS market leads the ASP market but during the crisis the ASP market leads the CDS market.

Keywords: Price Discovery; VECM; Credit Derivatives; Credit Spreads. (search for similar items in EconPapers)
JEL-codes: C32 C51 G13 G14 (search for similar items in EconPapers)
Date: 2010
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Journal Article: The effect of liquidity on the price discovery process in credit derivatives markets in times of financial distress (2011) Downloads
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