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Stock Liquidity as a Determinant of Credit Default Swap Spreads

Kaya, Mehmet Caglar LU and Manac, Radu-Dragomir LU (2013) NEKN02 20131
Department of Economics
Abstract
This research investigates the effect of stock liquidity on credit default swap spreads. The relationship between stock liquidity and CDS spreads is tested empirically using a panel data of 82 companies spanning a period of 64 months. To ensure the accuracy of our findings, we use three proxies for stock liquidity, namely the bid-ask spread, Amihud illiquidity measure and the turnover ratio. When controlling for other known firm-level factors, we obtain a relationship between stock liquidity measures and CDS spreads, indicating that higher stock liquidity leads to lower CDS spread. This relation also holds when macroeconomic factors are used as control variables. Thereby, we manage to find a link between the stock market and the CDS... (More)
This research investigates the effect of stock liquidity on credit default swap spreads. The relationship between stock liquidity and CDS spreads is tested empirically using a panel data of 82 companies spanning a period of 64 months. To ensure the accuracy of our findings, we use three proxies for stock liquidity, namely the bid-ask spread, Amihud illiquidity measure and the turnover ratio. When controlling for other known firm-level factors, we obtain a relationship between stock liquidity measures and CDS spreads, indicating that higher stock liquidity leads to lower CDS spread. This relation also holds when macroeconomic factors are used as control variables. Thereby, we manage to find a link between the stock market and the CDS market. This relationship helps predict the movement of CDS spreads by analyzing stock liquidity in the developed equity market. (Less)
Please use this url to cite or link to this publication:
author
Kaya, Mehmet Caglar LU and Manac, Radu-Dragomir LU
supervisor
organization
course
NEKN02 20131
year
type
H1 - Master's Degree (One Year)
subject
keywords
Turnover Ratio, Amihud Illliquidity, Bid-Ask Spread, Default Risk, Stock Liquidity, Credit Default Swaps
language
English
id
3808236
date added to LUP
2013-06-12 14:42:00
date last changed
2013-06-12 14:42:00
@misc{3808236,
  abstract     = {This research investigates the effect of stock liquidity on credit default swap spreads. The relationship between stock liquidity and CDS spreads is tested empirically using a panel data of 82 companies spanning a period of 64 months. To ensure the accuracy of our findings, we use three proxies for stock liquidity, namely the bid-ask spread, Amihud illiquidity measure and the turnover ratio. When controlling for other known firm-level factors, we obtain a relationship between stock liquidity measures and CDS spreads, indicating that higher stock liquidity leads to lower CDS spread. This relation also holds when macroeconomic factors are used as control variables. Thereby, we manage to find a link between the stock market and the CDS market. This relationship helps predict the movement of CDS spreads by analyzing stock liquidity in the developed equity market.},
  author       = {Kaya, Mehmet Caglar and Manac, Radu-Dragomir},
  keyword      = {Turnover Ratio,Amihud Illliquidity,Bid-Ask Spread,Default Risk,Stock Liquidity,Credit Default Swaps},
  language     = {eng},
  note         = {Student Paper},
  title        = {Stock Liquidity as a Determinant of Credit Default Swap Spreads},
  year         = {2013},
}