What Explains Credit Default Swaps Bid-Ask Spread?

• Main Author: CHEN, Yaru
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2007
• Subjects: Bid-Ask Spread; Credit Default Swaps; Liquidity; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/etd_coll/50; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1049&context=etd_coll
• Institution: Singapore Management University

The pace at which the Credit default swaps (CDS) has been growing since its inception topped all projections. Despite the rapid growth, there is still room for enhancement of liquidity in the CDS market. Asymmetric information is another concern of investors in CDS market, however, some literature addressed that it may not be as serious as regarded. Bid-ask spreads is commonly used as a proxy of both liquidity and asymmetric information. Our empirical study confirms that CDS bid-ask spread has explanatory power to CDS premium. We then investigate the liquidity component in CDS bid-ask spreads. We use the bond age, bond amount, and bond time-to-maturity as the liquidity measure. We confirm that the bond market and CDS market are closely correlated. However, the composition of CDS bid-ask spread need to be further studied.