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Debt market illiquidity and correlated default risk

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  • Javadi, Siamak
  • Mollagholamali, Mohsen

Abstract

We empirically test the theoretical prediction of the impact of debt market liquidity on correlated default risk. Confirming the theory, our results indicate that the lower debt market liquidity, leads to an economically significant increase in the correlated default risk. Also consistent with theory, we show that this effect is more pronounced for short-term debt.

Suggested Citation

  • Javadi, Siamak & Mollagholamali, Mohsen, 2018. "Debt market illiquidity and correlated default risk," Finance Research Letters, Elsevier, vol. 26(C), pages 266-273.
    • Handle: RePEc:eee:finlet:v:26:y:2018:i:c:p:266-273
    DOI: 10.1016/j.frl.2018.02.002
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    Cited by:

    1. Fu, Yumei & He, Feng & Li, Jintian & Zan, Bingyan, 2024. "Commonality in liquidity and corporate default risk - Evidence from China," Research in International Business and Finance, Elsevier, vol. 69(C).

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    More about this item

    Keywords

    Default correlation; Debt market liquidity; Credit default swap (Cds); Debt maturity; Correlation in default probabilities;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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