On the compensation for illiquidity in sovereign credit markets
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INVESTIGACIONMetadata
Title
On the compensation for illiquidity in sovereign credit marketsDate
2015-03Publisher
ElsevierBibliographic citation
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.Type
info:eu-repo/semantics/articlePublisher version
http://www.sciencedirect.com/science/article/pii/S1042444X15000213Version
info:eu-repo/semantics/submittedVersionSubject
Abstract
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 2015Rights
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