TY - JOUR
T1 - Credit Default Swaps, Fire-Sale Risk, and the Liquidity Provision in the Bond Market
AU - Massa, Massimo
AU - Zhang, Lei
PY - 2024/6
Y1 - 2024/6
N2 - We study the effect of credit default swaps (CDSs) on the bond market. Using a comprehensive sample of U.S. corporate bonds, we document that the presence of CDSs significantly increases bond liquidity and reduces yield spreads for investment grade bonds. We show that CDSs influence the bond market by lowering the impact of fire sales of institutional bondholders and facilitating inventory management for bond dealers who absorb fire sale shocks. However, the liquidity provision role of CDSs gets weakened after the CDS Big Bang in 2009, potentially because of the requirement of large upfront payments. © THE AUTHOR(S), 2023.
AB - We study the effect of credit default swaps (CDSs) on the bond market. Using a comprehensive sample of U.S. corporate bonds, we document that the presence of CDSs significantly increases bond liquidity and reduces yield spreads for investment grade bonds. We show that CDSs influence the bond market by lowering the impact of fire sales of institutional bondholders and facilitating inventory management for bond dealers who absorb fire sale shocks. However, the liquidity provision role of CDSs gets weakened after the CDS Big Bang in 2009, potentially because of the requirement of large upfront payments. © THE AUTHOR(S), 2023.
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UR - https://www.scopus.com/record/pubmetrics.uri?eid=2-s2.0-85164322968&origin=recordpage
U2 - 10.1017/S0022109023000844
DO - 10.1017/S0022109023000844
M3 - RGC 21 - Publication in refereed journal
SN - 0022-1090
VL - 59
SP - 1963
EP - 1996
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 4
ER -