The liquidity premium in CDS transaction prices: Do frictions matter?

Gehde-Trapp, Monika; Gündüz, Yalın; Nasev, Julia

doi:10.1016/j.jbankfin.2015.08.024

Cited by 29 publications

(17 citation statements)

References 55 publications

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“…Further, as noted by previous studies (e.g., Qiu and Yu ; Gehde‐Trapp et al. ), liquidity is priced into CDS premiums and endogenous to other determinants of CDS spreads. To address this issue, we follow Bhat et al.…”

Section: Methodsmentioning

confidence: 59%

“…To control for the influence of default risk on CDS spreads, we incorporate a market-based measure of default risk (DRISK) into our model. 15 Further, as noted by previous studies (e.g., Qiu and Yu 2012;Gehde-Trapp et al 2015), liquidity is priced into CDS premiums and endogenous to other determinants of CDS spreads. To address this issue, we follow Bhat et al (2016) to use the residual from the regression of the log of the bid-ask spread on firm size, stock return volatility, credit rating, and leverage as a proxy for liquidity (ILLIQUID) and include it in our model as a control variable.…”

mentioning

confidence: 86%

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The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

Chiu

Guan

Kim

2018

Contemporary Accting Res

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This study examines the relation between narrative risk disclosures in mandatory reports and the pricing of credit risk. In particular, we investigate whether and how the Securities and Exchange Commission (SEC) mandate of risk factor disclosures (RFDs) affects credit default swap (CDS) spreads. Based on the theory of Duffie and Lando (2001), we predict and find that CDS spreads decrease significantly after RFDs are made available in 10‐K/10‐Q filings. These results suggest that RFDs improve information transparency about the firm's underlying risk, thereby reducing the information risk premium in CDS spreads. The content analysis further reveals that disclosures pertinent to financial and idiosyncratic risk are especially relevant to credit investors. In cross‐sectional analyses, we document that RFDs are more useful for evaluating the business prospects and default risk of firms with greater information uncertainty/asymmetry. Overall, our findings imply that the SEC requirement for adding a risk factor section to periodic reports enhances the transparency of firm risk and facilitates credit investors in evaluating the credit quality of the firm.

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Section: Methodsmentioning

confidence: 59%

mentioning

confidence: 86%

The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

Chiu

Guan

Kim

2018

Contemporary Accting Res

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“…Tang and Yan (2015) also document that, besides the traditional determinants, CDS spreads are affected by supply-demand imbalance being the effect of excess demand of a higher magnitude. Gehde-Trapp, Gündüz, and Nasev (2015) show that CDS traders adjust their prices to the order flows they observe, with the adjustment of the premium growing stronger as inventory risk increases.…”

Section: Introductionmentioning

confidence: 95%

“…22,23 There are additional frictions and features of the sovereign CDS market that could help explain the role of common quotes from dealers facing buying pressure. According to market microstructure literature, common demand of a pair of sovereign CDS may be the result of managing inventory risk on single securities traded by a dealer facing that risk (Shachar, 2013;and Gehde-Trapp, Gündüz, and Nasev, 2015). 24 The buying pressure could also obey to the dealers' willingness to express their opinion or information on the country creditworthiness using naked CDS positions (Duffie, 2010).…”

Section: Comovements and Dealers' Trading Pressurementioning

confidence: 99%

Dealing with dealers: Sovereign CDS comovements

Antón¹,

Mayordomo

Rodríguez‐Moreno

2018

Journal of Banking & Finance

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views expressed in this paper are those of the authors and do not necessarily coincide with those of the Banco de España and the Eurosystem. This paper was partially drafted and circulated while Sergio Mayordomo was at the Spanish Securities and Exchange Commission under the title "Intraday credit risk spillovers in the European sovereign CDS market". We are very grateful for comments from Oriol Aspachs,

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“…Credit trading has received considerably less attention than equities or futures, and most studies have been done by or in collaboration with regulators who have privileged access to non-anonymous data. Gehde-Trapp et al [2015] study records from the German Bundesbank regarding single-name CDS issues. They find significant price impact using a model where the effect of each trade is permanent.…”

Section: Literature Reviewmentioning

confidence: 99%

Price Impact Without Order Book: A Study of the OTC Credit Index Market

Eisler

Bouchaud

2016

SSRN Journal

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We present a study of price impact in the over-the-counter credit index market, where no limit order book is used. Contracts are traded via dealers, that compete for the orders of clients. Despite this distinct microstructure, we successfully apply the propagator technique to estimate the price impact of individual transactions. Because orders are typically split less than in multilateral markets, impact is observed to be mainly permanent, in line with theoretical expectations. A simple method is presented to correct for errors in our classification of trades between buying and selling. We find a very significant, temporary increase in order flow correlations during late 2015 and early 2016, which we attribute to increased order splitting or herding among investors. We also find indications that orders advertised to less dealers may have lower price impact. Quantitative results are compatible with earlier findings in other more classical markets, further supporting the argument that price impact is a universal phenomenon, to a large degree independent of market microstructure.

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The liquidity premium in CDS transaction prices: Do frictions matter?

Abstract: The liquidity premium in CDS transaction prices: Do frictions matter? CFR Working Paper,

Cited by 29 publications

References 55 publications

The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

Dealing with dealers: Sovereign CDS comovements

Price Impact Without Order Book: A Study of the OTC Credit Index Market

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