RT Generic
T1 On the compensation for illiquidity in sovereign credit markets
A1 Groba, Jonatan
A1 Serrano, Pedro
A1 Lafuente Luengo, Juan Ángel
A2 Universidad Carlos III de Madrid. Departamento de Economía de la Empresa, 
AB This article analyzes the role of liquidity in the sovereign credit default swap (CDS) market. We employ a continuous-time specification to incorporate illiquidity as an additional pricing factor of default swap contracts for the most developed economies. The illiquidity discount process is identified as compensation to investors for the risk of unwinding their positions when trading in the less liquid part of the curve, and the information about illiquidity is directly extracted from the term structure of sovereign CDS spreads. Our empirical findings reveal that a positive time-varying illiquidity premium is embedded in sovereign default swaps. These risk premia exhibit substantial comovement across countries. Only unidirectional causality from default toliquidity is detected for the overall market
SN 2341-0795
YR 2014
FD 2014-10
LK https://hdl.handle.net/10016/19510
UL https://hdl.handle.net/10016/19510
LA eng
NO J. Groba acknowledges financial support from the Spanish Government project ECO2011-28134. J.A.Lafuente acknowledges financial support from the Ramon Areces Foundation, the Spanish Ministry ofEducation through grant ECO2012-31941, the Generalitat Valenciana through grant PrometeoII/2013/015 and the University Jaume I through grant P1.1A2012-09. P. Serrano acknowledges financialsupport from the Ministry of Economics and Competitiveness through grant ECO2012-34268
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RD 30 jun. 2024