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Gehde-Trapp, Monika; Gündüzc, Yalin; Nasev, Julia (December 2015): The liquidity premium in CDS transaction prices: Do frictions matter? In: Journal of Banking and Finance, Vol. 61: pp. 184-205
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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.