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Economic policy uncertainty, CDS spreads, and CDS liquidity provision

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  • Xinjie Wang
  • Weike Xu
  • Zhaodong (Ken) Zhong

Abstract

Using a news‐based index of economic policy uncertainty (EPU), we find that EPU is positively associated with credit default swap (CDS) spreads and negatively associated with the number of liquidity providers in the CDS market. A 10% increase in EPU leads to an 8.4% increase in CDS spreads and a 4.0% decrease in the number of liquidity providers. Furthermore, the effects of EPU are persistent and robust after controlling for macroeconomic variables. Our results are also robust to different econometric methodologies. Overall, our findings suggest that, when EPU is high, investors find credit protection more costly and difficult to purchase.

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  • Xinjie Wang & Weike Xu & Zhaodong (Ken) Zhong, 2019. "Economic policy uncertainty, CDS spreads, and CDS liquidity provision," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(4), pages 461-480, April.
    • Handle: RePEc:wly:jfutmk:v:39:y:2019:i:4:p:461-480
    DOI: 10.1002/fut.21982
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