Abstract
Based on individual CDS transactions cleared by the Depository Trust & Clearing Corporation, we show that illiquidity strongly affects credit default swap premiums. We identify the following effects: first, transaction direction affects prices, as buy (sell) orders lead to premium increases (decreases). Second, larger transactions have a higher price impact. This finding stands in stark contrast to corporate bond markets. Third, traders charge higher premiums as a price for liquidity provision, not as compensation for asymmetric information. Fourth, buy-side investors pay significantly higher prices than dealers for demanding liquidity. Finally, inventory risk seems to matter little in explaining liquidity premiums.
| Item Type: | Journal article |
|---|---|
| Keywords: | CDS; Illiquidity; Temporary price impact; Market power; Immediacy; DTCC |
| Faculties: | Munich School of Management |
| Subjects: | 300 Social sciences > 330 Economics |
| ISSN: | 1872-6372 ; 0378-4266 |
| Language: | English |
| Item ID: | 42746 |
| Date Deposited: | 22. Mar 2018, 15:00 |
| Last Modified: | 04. Nov 2020, 13:18 |
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