Economic policy uncertainty, CDS spreads, and CDS liquidity provision

Xinjie Wang; Weike Xu; Zhaodong (Ken) Zhong

doi:10.1002/fut.21982

Economic policy uncertainty, CDS spreads, and CDS liquidity provision

Xinjie Wang, Weike Xu, Zhaodong (Ken) Zhong

Rutgers Business School, Finance & Economics

Research output: Contribution to journal › Article › peer-review

27 Scopus citations

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.

Original language	English (US)
Pages (from-to)	461-480
Number of pages	20
Journal	Journal of Futures Markets
Volume	39
Issue number	4
DOIs	https://doi.org/10.1002/fut.21982
State	Published - Apr 2019

All Science Journal Classification (ASJC) codes

Accounting
Business, Management and Accounting(all)
Finance
Economics and Econometrics

Keywords

credit default swap
liquidity provision
market depth
policy uncertainty

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10.1002/fut.21982

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title = "Economic policy uncertainty, CDS spreads, and CDS liquidity provision",

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",

author = "Xinjie Wang and Weike Xu and Zhong, {Zhaodong (Ken)}",

note = "Funding Information: We are grateful for the valuable comments from Vikas Agarwal, Ka Kei Chan, Andrew Detzel, Brandon Lockhart, Denis Sosyura, Zhiguang Wang, and participants at the 2017 Southern Finance Association Annual Meetings and 2018 FMA Asia Pacific Conference. Special thanks go to Bob Webb (the Editor) and an anonymous referee for their valuable suggestions that significantly improved the quality and focus of our paper. All remaining errors are our own. X. W. acknowledges financial support from Southern University of Science and Technology (Grant No. Y01246210, Y01246110). Publisher Copyright: {\textcopyright} 2018 Wiley Periodicals, Inc.",

year = "2019",

month = apr,

doi = "10.1002/fut.21982",

language = "English (US)",

volume = "39",

pages = "461--480",

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AU - Wang, Xinjie

AU - Xu, Weike

AU - Zhong, Zhaodong (Ken)

N1 - Funding Information: We are grateful for the valuable comments from Vikas Agarwal, Ka Kei Chan, Andrew Detzel, Brandon Lockhart, Denis Sosyura, Zhiguang Wang, and participants at the 2017 Southern Finance Association Annual Meetings and 2018 FMA Asia Pacific Conference. Special thanks go to Bob Webb (the Editor) and an anonymous referee for their valuable suggestions that significantly improved the quality and focus of our paper. All remaining errors are our own. X. W. acknowledges financial support from Southern University of Science and Technology (Grant No. Y01246210, Y01246110). Publisher Copyright: © 2018 Wiley Periodicals, Inc.

PY - 2019/4

Y1 - 2019/4

N2 - 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.

AB - 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.

KW - credit default swap

KW - liquidity provision

KW - market depth

KW - policy uncertainty

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JO - Journal of Futures Markets

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Economic policy uncertainty, CDS spreads, and CDS liquidity provision

Abstract

All Science Journal Classification (ASJC) codes

Keywords

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