Funding liquidity shocks in a quasi-experiment: Evidence from the CDS Big Bang |
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| Authors: | Xinjie Wang Yangru Wu Hongjun Yan Zhaodong Zhong |
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| Institution: | 1. Department of Finance, Southern University of Science and Technology, 1088 Xueyuan Blvd., Shenzhen, Guangdong 518055, China;2. Department of Finance and Economics, Rutgers Business School, Rutgers University, 100 Rockafeller Road, Piscataway, NJ 08854, United States;3. Department of Finance, DePaul University, 1 E. Jackson Blvd., Suite 5500, Chicago, IL 60604, United States;1. Rotterdam School of Management, Erasmus University, Department of Finance, Burgemeester Oudlaan 50, P.O. Box 1738, DR Rotterdam 3000, the Netherlands;2. KU Leuven, Faculty of Economics and Business (FEB), Antwerp Carolus Campus, Korte Nieuwstraat 33, Antwerp 2000, Belgium;3. The Liquid House, Aalmoezenierstraat 13, Antwerp 2000, Belgium;1. Harvard Business School, United States;2. Princeton University, United States;1. Oslo Metropolitan University, Oslo Business School, Pilestredet 46, Oslo 0130, Norway;2. The Arctic University of Norway, Hansine Hansens veg 18, Tromsø N-9019, Norway;3. Department of Banking and Finance, Monash University, 900 Dandenong Rd., Caulfield East VIC 3145, Australia;1. Erasmus Scchool of Economics - Burgemeester Oudlaan 50, Erasmus University Rotterdam, Rotterdam PA 3062, the Netherlands;2. Tilburg University - Warandelaan 2, Tilburg AB 5037, the Netherlands;1. Haas School of Business, UC Berkeley and NBER, 545 Student Services Building, Berkeley, CA 94720-1900, USA;2. Anderson School of Management, UCLA and NBER, 110 Westwood Plaza, Los Angeles, CA 90095, USA;1. University of Toronto, 105 St George St, Toronto, ON M5S 3E6 United States;2. Boston College, 140 Commonwealth Avenue Chestnut Hill, MA 02467–3809 United States;3. Pennsylvania State University, 360 Business Building University Park, PA 16802 United States |
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| 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. |
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