Use this URL to cite or link to this record in EThOS: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.568021
Title: Sovereign default and liquidity risks in the bond and CDS markets
Author: Badaoui, Saad
Awarding Body: Imperial College London
Current Institution: Imperial College London
Date of Award: 2013
Availability of Full Text:
Access from EThOS:
Full text unavailable from EThOS. Please try the link below.
Access from Institution:
Abstract:
This thesis focuses on the different liquidity issues specific to the sovereign Credit Default Swap (CDS) market. As a first step, we present an empirical study of the pricing effect of liquidity and systematic liquidity risk in the sovereign CDS spreads. We do find a large evidence that the risk premium priced above the sovereign default risk is mainly driven by both bond and CDS liquidity risk, which implies that liquidity plays an important role in CDS spread movements. Secondly, we use a factor model in order to decompose sovereign CDS spreads into default risk, liquidity and correlation components. The main objective is to measure the weight of liquidity in the CDS spreads not by using liquidity proxies such as bid-ask spreads or volumes but by calibrating the model to the data. Our analysis reveals that sovereign CDS spreads are highly driven by liquidity (55.6% of default risk and 44.32% of liquidity) and that sovereign bond spreads are less subject to liquidity frictions and therefore could represent a better proxy for sovereign default risk (73% of default risk and 26.86% of liquidity). Our empirical results advance the idea that the increase in the CDS spreads observed during the crisis period was mainly due to a surge in liquidity rather than to an increase in the default intensity. Finally, we focus on the dynamic properties of the risk neutral liquidity risk premium embedded in the term structure of sovereign CDS spreads. We show that liquidity risk has a non-trivial role and participates directly to the variation over time of the term structure of sovereign CDS spreads. Our results show that CDS buyers earned a liquidity premium only during the pre-crisis period.
Supervisor: El-Jahel, Lina ; Cathcart, Lara Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.568021  DOI: Not available
Share: