Funding liquidity shocks in a quasi-experiment: Evidence from the CDS Big Bang

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 t...

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Bibliographic Details
Published in:Journal of financial economics 2021-02, Vol.139 (2), p.545-560
Main Authors: Wang, Xinjie, Wu, Yangru, Yan, Hongjun, Zhong, Zhaodong (Ken)
Format: Article
Language:English
Subjects:
Banks (Finance)
CDS Big Bang
CDS Small Bang
Central clearing
Conferences and conventions
Contracts
Conventions
Credit default swaps
Fees & charges
Financial management
Financial markets
Funding
Funding liquidity
Liquidity
Liquidity (Finance)
Quasi-experimental methods
Securities markets
Standardization
Trading
Transactions
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2020.08.004