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REGIME‐DEPENDENT LIQUIDITY DETERMINANTS OF CREDIT DEFAULT SWAP SPREAD CHANGES
Author(s) -
Guo Biao,
Newton David
Publication year - 2013
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2013.12011.x
Subject(s) - market liquidity , credit default swap , leverage (statistics) , econometrics , pooling , credit risk , volatility (finance) , economics , monetary economics , credit default swap index , liquidity risk , credit valuation adjustment , financial economics , business , actuarial science , mathematics , statistics , computer science , credit reference , artificial intelligence
In this article we construct a liquidity measure for credit default swaps (CDS) and investigate the relation between the changes in CDS spreads and the determinants implied by structural models of default, including firm leverage, volatility, risk‐free interest rate, and liquidity. Using a dummy‐variable pooling regression and a Markov regime‐switching model, we show strong evidence that these determinants, especially the liquidity determinant, are significant and time varying.