PT  - JOURNAL ARTICLE
AU  - Xiaoling Pu
AU  - Junbo Wang
AU  - Chunchi Wu
TI  - Are Liquidity and Counterparty Risk Priced in the Credit Default Swap Market?
AID  - 10.3905/jfi.2011.20.4.059
DP  - 2011 Mar 31
TA  - The Journal of Fixed Income
PG  - 59--79
VI  - 20
IP  - 4
4099  - https://pm-research.com/content/20/4/59.short
4100  - https://pm-research.com/content/20/4/59.full
AB  - 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.TOPICS: Credit default swaps, counterparty risk, information providers/credit ratings, statistical methods