Economic policy uncertainty,CDS spreads,and CDS liquidity provision |
| |
| Authors: | Xinjie Wang Weike Xu Zhaodong Zhong |
| |
| Affiliation: | 1. Department of Finance, Southern University of Science and Technology, Shenzhen, China;2. Department of Finance, College of Business, Clemson University, Clemson, South Carolina;3. Department of Finance and Economics, Rutgers Business School, Rutgers University, Piscataway, New Jersey |
| |
| Abstract: | Using a news-based index of economic policy uncertainty (EPU), we find that EPU is positively associated with credit default swap (CDS) spreads and negatively associated with the number of liquidity providers in the CDS market. A 10% increase in EPU leads to an 8.4% increase in CDS spreads and a 4.0% decrease in the number of liquidity providers. Furthermore, the effects of EPU are persistent and robust after controlling for macroeconomic variables. Our results are also robust to different econometric methodologies. Overall, our findings suggest that, when EPU is high, investors find credit protection more costly and difficult to purchase. |
| |
| Keywords: | credit default swap liquidity provision market depth policy uncertainty |
|
|
