Aggregate default and illiquidity of credit default swap spreads

摘要

This paper focuses primarily on aggregate default and illiquidity in the credit default swap (CDS) market. We examine how changes in aggregate default and illiquidity are related to changes in spreads of CDS portfolios sorted by credit quality and maturity. We document that aggregate default and liquidity are important determinants of CDS spreads. The default and illiquidity CDS betas across credit quality portfolios and maturities are positive and statistically significant. Low credit rating CDS spreads are highly sensitive to aggregate default and illiquidity shocks relative to high credit quality CDS spreads.