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Liquidity Tail Risk and Credit Default Swap Spreads

Irresberger, Felix; Weiß, Gregor N.F.; Gabrysch, Janet; Gabrysch, Sandra

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Authors

Gregor N.F. Weiß

Janet Gabrysch

Sandra Gabrysch



Abstract

We show that liquidity tail risk in credit default swap (CDS) spreads is time-varying and explains variation in CDS spreads. We capture the liquidity tail risk of a CDS contract written on a firm by estimating the tail dependence, i.e., the asymptotic probability of a joint surge in the bid-ask spread of the firm’s CDS and the illiquidity of a CDS market index. Our results show that protection sellers earn a statistically and economically significant premium for bearing the risk of joint extreme downwards movements in the liquidity of individual CDS contracts and the CDS market. This effect holds in various robustness checks such as instrumental variable regressions and alternative liquidity measures and is particularly pronounced during the financial crisis.

Citation

Irresberger, F., Weiß, G. N., Gabrysch, J., & Gabrysch, S. (2018). Liquidity Tail Risk and Credit Default Swap Spreads. European Journal of Operational Research, 269(3), 1137-1153. https://doi.org/10.1016/j.ejor.2018.02.030

Journal Article Type Article
Acceptance Date Feb 13, 2018
Online Publication Date Feb 19, 2018
Publication Date 2018-09
Deposit Date Jul 23, 2020
Publicly Available Date Mar 28, 2024
Journal European Journal of Operational Research
Print ISSN 0377-2217
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 269
Issue 3
Pages 1137-1153
DOI https://doi.org/10.1016/j.ejor.2018.02.030
Public URL https://durham-repository.worktribe.com/output/1265649
Related Public URLs http://eprints.whiterose.ac.uk/127526/

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