On the compensation for illiquidity in sovereign credit markets
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Título
On the compensation for illiquidity in sovereign credit marketsFecha de publicación
2015-03Editor
ElsevierCita bibliográfica
LAFUENTE, Juan Angel; SERRANO, Pedro. On the compensation for illiquidity in sovereign credit markets. Journal of Multinational Financial Management, 2015, vol. 30, p. 83-100.Tipo de documento
info:eu-repo/semantics/articleVersión de la editorial
http://www.sciencedirect.com/science/article/pii/S1042444X15000213Versión
info:eu-repo/semantics/submittedVersionPalabras clave / Materias
Resumen
This article analyzes the role of liquidity in the sovereign credit default swap (CDS) market. We employ a continuous-time specification to incorporate illiquidity as an additional pricing factor of default swap ... [+]
This article analyzes the role of liquidity in the sovereign credit default swap (CDS) market. We employ a continuous-time specification to incorporate illiquidity as an additional pricing factor of default swap contracts for the most developed economies. The illiquidity discount process is identified as compensation to investors for the risk of unwinding their positions when trading in the less liquid part of the curve, and the information about illiquidity is directly extracted from the term structure of sovereign CDS spreads. Our empirical findings reveal that a positive time-varying illiquidity premium is embedded in sovereign default swaps. These risk premia exhibit substantial comovement across countries. Only unidirectional causality from default to liquidity is detected for the overall market. [-]
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Journal of Multinational Financial Management Volume 30, March 2015Derechos de acceso
Copyright © 2015 Elsevier B.V. All rights reserved.
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