Research seminar by Armen Arakelyan (Universidad Carlos III de Madrid): «Liquidity in Credit Default Swap Markets»

On Thursday, December 8 at 4.30 pm International College of Economics and Finance held Research seminar.
Speaker: Armen Arakelyan (Universidad Carlos III de Madrid)
Theme: «Liquidity in Credit Default Swap Markets», joint with Pedro Serrano
Venue: Pokrovski Bulvar, 11, Room Zh-822

Abstact: We explore the relationship between Credit Default Swap (CDS) spreads and CDS liquidity supply. We proxy the liquidity of a CDS name by the number of contributors and bid-ask spreads. We characterize this relationship in two ways: first, we perform a panel data analysis to explore the link between our liquidity proxies and plain CDS spreads. Second, we develop an alternative GMM approach to Pan and Singleton (2008) to quantify the CDS default risk premium, examining its relationship with our liquidity measures. Our results indicate that bid-ask spreads are an important factor in explaining illiquidity of both CDS spreads and CDS implied risk premiums. The evidence on the usefulness of the number of contributors as a measure of liquidity is weak.