Liquidity Commonalities in the Corporate CDS Market around the 2007-2012 Financial Crisis

Sergio Mayordomo, Juan Ignacio Peña () and María Rodríguez-Moreno ()
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Juan Ignacio Peña: Department of Business Administration, Universidad Carlos III de Madrid
María Rodríguez-Moreno: European Central Bank
Authors registered in the RePEc Author Service: Maria Rodriguez-Moreno

No 23/12, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: This study presents robust empirical evidence suggesting the existence of significant liquidity commonalities in the corporate Credit Default Swap (CDS) market. Using daily data for 438 firms from 25 countries in the period 2005-2012 we find that these commonalities vary over time, being stronger in periods in which the global, counterparty, and funding liquidity risks increase. However, commonalities do not depend on firm's characteristics. The level of the liquidity commonalities differs across economic areas being on average stronger in the European Monetary Union. The effect of market liquidity is stronger than the effect of industry specific liquidity in most industries excluding the banking sector. We document the existence of asymmetries in commonalities around financial distress episodes such that the effect of market liquidity is stronger when the CDS market price increases. The results are not driven by the CDS data imputation method or by the liquidity of firms with high credit risk and are robust to alternative liquidity measures.

Keywords: Credit Default Swap; Liquidity Commonalities; Global Risk; Funding Liquidity Risk; Counterparty Risk (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2012-12-21
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (12)

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http://www.unav.edu/documents/10174/6546776/1356049609_WP_UNAV_23_12.pdf (application/pdf)

Related works:
Journal Article: Liquidity commonalities in the corporate CDS market around the 2007–2012 financial crisis (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:una:unccee:wp2312

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