Are liquidity and counterparty risk priced in the credit default swap market?

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)59-79
Journal / PublicationJournal of Fixed Income
Issue number4
Publication statusPublished - Mar 2011


This article examines the effects of liquidity and counterparty risk factors on CDS pricing. Using a marketwide counterparty risk measure, the authors estimate the risk premium associated with systematic counterparty defaults. They find evidence that both liquidity and counterparty risk factors are important over and beyond the effects of traditional default variables implied by the structural model. The effects of these factors are economically significant and stronger for reference entities with lower ratings. Systematic counterparty risk exerts a positive effect on the CDS spread. The relationships between CDS spreads and liquidity and default and marketwide counterparty risk factors vary in the face of changes in the market liquidity condition. Default and counterparty risk become greater concerns for investors during times of low liquidity in the financial market.

Research Area(s)

  • Credit default swaps, counterparty risk, information providers/credit ratings, statistical methods

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Month information for this publication is provided by the author(s) concerned.

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