J Shanghai Jiaotong Univ Sci

Journal of shanghai Jiaotong University (Science) ›› 2016, Vol. 21 ›› Issue (1): 69-80.doi: 10.1007/s12204-016-1701-8

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Informed Trading, Heterogeneity Investment, Liquidity Shocks and the Valuation of Credit Default Swaps

Informed Trading, Heterogeneity Investment, Liquidity Shocks and the Valuation of Credit Default Swaps

YANG Xing1 (杨星), FAN Chun1* (范纯), LI Gang2* (李刚)   

  1. (1. College of Economics, Jinan University, Guangzhou 510632, China; 2. Institute of Finance, Yuexiu Financial Holdings Group Co., Ltd., Guangzhou 510000, China)
  2. (1. College of Economics, Jinan University, Guangzhou 510632, China; 2. Institute of Finance, Yuexiu Financial Holdings Group Co., Ltd., Guangzhou 510000, China)
  • Online:2016-02-29 Published:2016-03-21
  • Contact: FAN Chun1* (范纯), LI Gang2* (李刚) E-mail:fanchun1990@aliyun.com, li.gang2@yuexiu.com

Abstract: This paper explores the effect of informed trading, heterogeneity investment and liquidity shocks on the valuation of credit default swaps (CDSs). Under the condition of asymmetric information, the informed trading plays an important role in the valuation of CDS. Instruction order flow has a significant influence on CDS price. And the scope of influence changes in accordance with different time interval, company status and the size of bid-ask spread. Heterogeneity of investors seriously affects the market liquidity and subsequently affects the CDS price. The bigger heterogeneity of the investment philosophy, investment habits, investment preference and so on is the bigger risk for market liquidity, and the higher price for CDS shall be. On the contrary, the conclusion is also consistent. The effectiveness of liquidity, whether it is before or after the financial crisis, dominates the fluctuation of CDS price. The premium of liquidity accounts for 36% to 50% of the CDS price.

Key words: informed trading| heterogeneity investment| liquidity shocks| valuation of credit default swaps

摘要： This paper explores the effect of informed trading, heterogeneity investment and liquidity shocks on the valuation of credit default swaps (CDSs). Under the condition of asymmetric information, the informed trading plays an important role in the valuation of CDS. Instruction order flow has a significant influence on CDS price. And the scope of influence changes in accordance with different time interval, company status and the size of bid-ask spread. Heterogeneity of investors seriously affects the market liquidity and subsequently affects the CDS price. The bigger heterogeneity of the investment philosophy, investment habits, investment preference and so on is the bigger risk for market liquidity, and the higher price for CDS shall be. On the contrary, the conclusion is also consistent. The effectiveness of liquidity, whether it is before or after the financial crisis, dominates the fluctuation of CDS price. The premium of liquidity accounts for 36% to 50% of the CDS price.

关键词: informed trading| heterogeneity investment| liquidity shocks| valuation of credit default swaps

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