Liquidity Commonality Across the Bond and CDS Markets

Abstract

Notes: Proportion of zero spread changes (Szero) is the ratio of zero daily spread changes to the total number of non-missing observations in a month. Market depth (Depth) is measured as the average number of contributors for five-year CDS quotes in a month. For each firm, the average of the measures is calculated, then the descriptive statistics are computed across the sample. Notes: This exhibit reports the autocorrelation of the first principal component of each liquidity measure and across measures. The common factors are extracted by using the APC method. "All" refers to the first component extracted from all the nine measures. "CDS" refers to the first component extracted from the two credit liquidity measures. "Bond" refers to the first component extracted from all the seven liquidity measures.

Liquidity commonalities in the corporate CDS market around the 2007–2012 financial crisis

“…The method employed by Pu (2009) corporate bond, and equity markets and find a dominant first principal component in the CDS market for the CDS liquidity measures considered. Other papers that study the determinants of bid-ask spread use market liquidity as an additional driver of individual CDSs' liquidity (e.g.…”

“…We share some of the objectives pursued by Pu (2009) but in contrast to her analysis, our study is carried out using daily data that covers the recent financial crisis and documents both the time varying behavior of liquidity commonalities and their determinants during this crisis. Additionally, our paper exploits a much more extensive database which allows us to deal explicitly with the differences in terms of commonalities of the different economic areas besides the US, and also to include firms from all sectors.…”

“…Pu's (2009) is the first paper that considers explicitly the commonalities in the CDS market. This author finds a strong commonality across all liquidity measures in the CDS market and also in the bond market using monthly data from 2002 to 2005 for a sample of non-financial U.S. firms.…”

“…Liquidity commonalities can be defined as the co-movement of individual liquidity measures with market-and industry-wide liquidity. The objective of this paper is to provide new evidence on the co-movement in liquidity for the CDS market, which was firstly documented by Pu (2009), from a threefold perspective: first, the analysis of the time-varying behavior of the commonalities putting special emphasis on the financial crisis events; secondly, the use of different economic areas and industries for the analysis of such commonalities; and, thirdly the analysis of the factors influencing this co-movement at both aggregate and firm levels.…”

Explaining co-movements between equity and CDS bid-ask spreads

“…In particular, to the best of my knowledge, there is no study that examines the channels of liquidity commonality across equity and credit default swaps. 1 Some existing papers study instead the CDS-bond liquidity commonality (see Pu 2009) and the equityequity options liquidity commonality (see Cao and Wei 2010).…”