Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/167570
Authors: 
Kamga, Merlin Kuate
Wilde, Christian
Year of Publication: 
2017
Series/Report no.: 
SAFE Working Paper 173
Abstract: 
We develop a state-space model to decompose bid and ask quotes of CDS into two components, fair default premium and liquidity premium. This approach gives a better estimate of the default premium than mid quotes, and it allows to disentangle and compare the liquidity premium earned by the protection buyer and the protection seller. In contrast to other studies, our model is structurally much simpler, while it also allows for correlation between liquidity and default premia, as supported by empirical evidence. The model is implemented and applied to a large data set of 118 CDS for a period ranging from 2004 to 2010. The model-generated output variables are analyzed in a difference-in-difference framework to determine how the default premium, as well as the liquidity premium of protection buyers and sellers, evolved during different periods of the financial crisis and to which extent they differ for financial institutions compared to non-financials.
Subjects: 
CDS
liquidity
JEL: 
C22
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
826.24 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.