Essays in Liquidity and Financial Markets
Radu-Dragomir Manac2018
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Abstract
This thesis presents three studies related to the effects of liquidity on financial markets. The first topic explores the relationship between funding liquidity and credit default swap (CDS) spreads. Using panel estimations, this study provides evidence that a tightening of funding liquidity increases spreads, effect which is three times larger in magnitude for high-CDS entities compared to low-CDS firms. Moreover, this paper highlights the impact of the 'CDS Small Bang' regulatory changes, especially the introduction of fixed coupons which induced upfront fees for trading CDSs. We find that after the introduction of the fees, funding liquidity changes have a much larger and more significant impact on CDS spread changes. The second study presents an empirical investigation of the theoretical predictions of Brunnermeier and Pedersen (2009) connecting funding liquidity with market liquidity and volatility and an extension of these linkages to CDS spreads. Specifically, in a Eu...
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