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Liquidity Premia in CDS Markets
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Datum
2017-07-14
Autor
Kamga, Merlin Kuate
Wilde, Christian
SAFE No.
173
Metadata
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Zusammenfassung
We develop a state-space model to decompose bid and ask quotes of CDS into two components, fair default premium and liquidity premium. This approach gives a better estimate of the default premium than mid quotes, and it allows to disentangle and compare the liquidity premium earned by the protection buyer and the protection seller. In contrast to other studies, our model is structurally much simpler, while it also allows for correlation between liquidity and default premia, as supported by empirical evidence. The model is implemented and applied to a large data set of 118 CDS for a period ranging from 2004 to 2010. The model-generated output variables are analyzed in a difference-in-difference framework to determine how the default premium, as well as the liquidity premium of protection buyers and sellers, evolved during different periods of the financial crisis and to which extent they differ for financial institutions compared to non-financials.
Forschungsbereich
Financial Markets
Financial Institutions
Financial Institutions
Schlagworte
cds, liquidity
JEL-Klassifizierung
C22, G12
Forschungsdaten
Thema
Consumption
Fiscal Stability
Financial Markets
Fiscal Stability
Financial Markets
Beziehungen
1
Publikationstyp
Working Paper
Link zur Publikation
Collections
- LIF-SAFE Working Papers [334]