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Endogenous Liquidity in Credit Derivatives
Preprint

Endogenous Liquidity in Credit Derivatives

Abstract

We study the determination of liquidity provision as measured by the number of distinct dealers providing quotes in the single-name credit default swap (CDS) market. Cross-sectionally, liquidity is concentrated among large obligors and those near the investment-grade/speculative-grade cutoff. Consistent with endogenous liquidity provision by informed financial institutions, more liquidity is associated with obligors for which there is a greater information flow from the CDS market to the stock market ahead of major credit events. Furthermore, the level of information heterogeneity plays a prominent role in how liquidity provision responds to transaction demand and how liquidity is priced into the CDS premium.

Authors

Qiu J; Yu F

Publication date

January 1, 2011

DOI

10.2139/ssrn.1785750

Preprint server

SSRN Electronic Journal
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