Publication: Liquidity Commonalities in the Corporate CDS Market around
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2012-10
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Abstract
This study presents robust empírical evidence suggesting the existence of significant liquidity
commonalities in the corporate Credit Default Swap (CDS) market. Using daily data for 438
firms from 25 countries in the period 2005-2012 we find that these commonalities vary over
time, being stronger in periods in which the global, counterparty, and funding liquidity risks
increase. However, commonalities do not depend on finn's characteristics. The leve! of the
liquidity commonalities differs across economic areas being on average stronger in the
European Monetary Union. The effect of market liquidity is stronger than the effect of
industry specific liquidity in most industries excluding the banking sector. We document the
existence of asymmetries in commonalities around financia! distress episodes such that the
effect of market 1iquidity is stronger when the CDS market price increases. The results are
not driven by the CDS data imputation method or by the liquidity of firms with high credit
risk and are robust to altemative liquidity measures.
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Credit default swap, Liquidity commonalities, Global risk, Funding liquidity risk, Counterparty risk