Skip to main content
SpringerLink
Log in

Informed trading, heterogeneity investment, liquidity shocks and the valuation of credit default swaps

  • Published:
Journal of Shanghai Jiaotong University (Science) Aims and scope Submit manuscript

Abstract

This paper explores the effect of informed trading, heterogeneity investment and liquidity shocks on the valuation of credit default swaps (CDSs). Under the condition of asymmetric information, the informed trading plays an important role in the valuation of CDS. Instruction order flow has a significant influence on CDS price. And the scope of influence changes in accordance with different time interval, company status and the size of bid-ask spread. Heterogeneity of investors seriously affects the market liquidity and subsequently affects the CDS price. The bigger heterogeneity of the investment philosophy, investment habits, investment preference and so on is the bigger risk for market liquidity, and the higher price for CDS shall be. On the contrary, the conclusion is also consistent. The effectiveness of liquidity, whether it is before or after the financial crisis, dominates the fluctuation of CDS price. The premium of liquidity accounts for 36% to 50% of the CDS price.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. BONGAERTS D, JONG F D, DRIESSEN J. Derivative pricing with liquidity risk: Theory and evidence from credit default swap market [J]. Journal of Finance, 2011, 66(1): 203–240.

    Article  Google Scholar 

  2. ACHARYAV V, PEDERSEN L H. Asset pricing with liquidity risk [J]. Journal of Financial Economics, 2005, 77(2): 375–410.

    Article  Google Scholar 

  3. HASBROUCK J. Measuring the information content of stock trades [J]. Journal of Finance, 1991, 46(1): 179–207.

    Article  Google Scholar 

  4. CAMERON A C, TRIVEDI P K. Microeconometrics methods and applications [M]. New York: Cambridge University Press, 2005.

    Book  Google Scholar 

  5. PIRES P, PEREIRA J P, MARTINS L F. The complete picture of credit default swap spreads: A quantile regression approach [EB/OL]. [2010–07-13]. http://papers.ssrn.com/sol3/papers.cfm?abstractid=1125265.

  6. ACHARYA V V, JOHNSON T C. Insider trading in credit derivatives [J]. Journal of Financial Economics, 2007, 84(1): 110–141.

    Article  Google Scholar 

  7. TANG D Y, YAN H. Liquidity and credit default swap spreads [EB/OL]. (2007-09-04) [2009-01-22]. http://papers.ssrn.com/sol3/papers.cfm?abstract id=891263.

  8. GÂRLEANU N, PEDERSEN L H, POTESHMAN A M. Demand-based option pricing [J]. Review of Financial Studies, 2009, 22(10): 4259–4299.

    Article  Google Scholar 

  9. BOLLEN N P B, WHALEY R E. Does net buying pressure affect the shape of implied volatility function? [J]. Journal of Finance, 2004, 59(2): 711–753.

    Article  Google Scholar 

  10. CHORDIA T, ROLL R, SUBRAHMANYAM A. Commonality in liquidity [J]. Journal of Financial Economics, 2000, 56(1): 3–28.

    Article  Google Scholar 

  11. DUFOUR A, ENGLE R F. Time and the price impact of a trade [J]. Journal of Finance, 2000, 55(6): 2467–2498.

    Article  Google Scholar 

  12. TANG D Y, YAN H. Does the tail wag the dog? The price impact of CDS trading [EB/OL]. [2010-06-30]. http://papers.ssrn.com/sol3/papers.cfm?abstract id=1632976.

  13. HASBROUCK J, SEPPI D J. Common factors in prices, order flows and liquidity [J]. Journal of Financial Economics, 2001, 59(3): 383–411.

    Article  Google Scholar 

  14. BÜHLER W, TRAPP M. Credit and liquidity risk in bond and CDS market [EB/OL]. (2007-02-01) [2007-03-03]. http://papers.ssrn.com/sol3/papers.cfm?abstractid=967301.

  15. BÜHLER W, TRAPP M. Time-varying credit risk and liquidity premia in bond and CDS markets [EB/OL]. [2008-03-07]. http://papers.ssrn.com/sol3/papers.cfm?abstractid=1101730

  16. CHEN L H, HAMMOUDEH S, YUAN Y. Asymmetric convergence in US financial credit default swap sector index markets [J]. The Quarterly Review of Economics and Finance, 2011, 51(4): 408–418.

    Article  Google Scholar 

  17. BADAOUI S, CATHCART L, EI-JAHEL L. Implied liquidity risk premium in the term structure of sovereign credit default swap and bond spreads [EB/OL]. [2014-01-05]. http://papers.ssrn.com/sol3/papers.cfm?abstract id=2317966.

  18. GÜNDÜZ Y, KAYA O. Impacts of the financial crisis on eurozone sovereign CDS spreads [J]. Journal of International Money and Finance, 2014, 49: 425–442.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. College of Economics, Jinan University, Guangzhou, 510632, China

    Xing Yang  (杨 星) & Chun Fan  (范 纯)

  2. Institute of Finance, Yuexiu Financial Holdings Group Co., Ltd., Guangzhou, 510000, China

    Gan Li  (李 刚)

Authors
  1. Xing Yang  (杨 星)
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Chun Fan  (范 纯)
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Gan Li  (李 刚)
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding authors

Correspondence to Chun Fan  (范 纯) or Gan Li  (李 刚).

Additional information

Foundation item: the National Social Science Foundation of China (No. 11BGJ013)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Yang, X., Fan, C. & Li, G. Informed trading, heterogeneity investment, liquidity shocks and the valuation of credit default swaps. J. Shanghai Jiaotong Univ. (Sci.) 21, 69–80 (2016). https://doi.org/10.1007/s12204-016-1701-8

Download citation

  • Received:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12204-016-1701-8

Keywords

CLC number

Search

Navigation