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Journal of Financial Economics Vol. 139 No. 2 2021

Funding liquidity shocks in a quasi-experiment: Evidence from the CDS Big Bang

Xinjie Wang1; Yangru Wu2; Hongjun Yan3; Zhaodong Zhong2

1 Southern University of Science and Technology · 2 Rutgers, The State University of New Jersey · 3 DePaul University

Abstract

We use the advent of new credit default swap (CDS) trading conventions in April 2009—the CDS Big Bang—to study how a shock to funding liquidity impacts market liquidity. After the Big Bang, traders are required to pay upfront fees to execute CDS transactions, with the size of the fees depending on the level of CDS spreads. While CDS bid-ask spreads decline in aggregate after the Big Bang, they do so less for contracts that require larger fees. Furthermore, the funding effect is stronger for smaller and riskier firms and for noncentrally cleared contracts. The effect also becomes stronger after Deutsche Bank's exit.

DOI
10.1016/j.jfineco.2020.08.004
Volume
139
Issue
2
Pages
545-560
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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