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Faculty & Research


Credit Default Swaps, Fire Sale Risk and the Liquidity Provision in the Bond Market

Journal Article
The authors study the effect of credit default swaps on the bond market. Using a comprehensive sample of US corporate bonds, the authors document that the presence of CDSs significantly increases bond liquidity and reduces yield spreads for investment grade bonds. The authors show that CDSs influence the bond market by lowering the impact of fire sales of institutional bondholders and facilitating inventory management for bond dealers who absorb fire sale shocks. However, the liquidity provision role of CDSs gets weakened after the CDS Big Bang in 2009, potentially because of the requirement of large upfront payments.

Professor of Finance