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The Journal of Fixed Income

The Journal of Fixed Income

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Article

Are Liquidity and Counterparty Risk Priced in the Credit Default Swap Market?

Xiaoling Pu, Junbo Wang and Chunchi Wu
The Journal of Fixed Income Spring 2011, 20 (4) 59-79; DOI: https://doi.org/10.3905/jfi.2011.20.4.059
Xiaoling Pu
is an assistant professor of finance at Kent State University in Kent, OH. xpu2@kent.edu
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Junbo Wang
is an associate professor of finance at City University of Hong Kong in Hong Kong. jwang2@cityu.edu.hk
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Chunchi Wu
is a manufacturers and traders (M&T) Chair in Banking and Finance at State University of New York, in Buffalo, NY. chunchiw@buffalo.edu
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Abstract

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.

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The Journal of Fixed Income: 20 (4)
The Journal of Fixed Income
Vol. 20, Issue 4
Spring 2011
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Are Liquidity and Counterparty Risk Priced in the Credit Default Swap Market?
Xiaoling Pu, Junbo Wang, Chunchi Wu
The Journal of Fixed Income Mar 2011, 20 (4) 59-79; DOI: 10.3905/jfi.2011.20.4.059

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Are Liquidity and Counterparty Risk Priced in the Credit Default Swap Market?
Xiaoling Pu, Junbo Wang, Chunchi Wu
The Journal of Fixed Income Mar 2011, 20 (4) 59-79; DOI: 10.3905/jfi.2011.20.4.059
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  • Article
    • Abstract
    • THEORETICAL DETERMINANTS OF CREDIT DEFAULT SWAP SPREADS
    • DATA
    • EMPIRICAL RESULTS
    • CONCLUDING REMARKS
    • ENDNOTES
    • REFERENCES
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Cited By...

  • Counterparty Credit Risk in the Municipal Bond Market
  • Scopus (4)
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More in this TOC Section

  • The Bond Coupon’s Impact on Liquidity
  • Reach for Safety
  • Global Risk Co-Moments and Carry Trade Strategy
Show more Article

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