Term Structure of Credit Default Swap Liquidity Premiums

Abstract

Across credit classes for alternative financial scenarios, this study estimates the term structure of credit default swap liquidity premiums (LPs) using dual estimation. The authors find that the term structures of LPs were positively sloped and concave in the first three of the four economic epochs considered but that they became negatively sloped and convex during the Dodd-Frank era. LPs were disproportionally large across the time to maturity for both grades of swaps examined during the financial crisis. In addition, for a given epoch and time to maturity, speculative grade swaps uniformly suffered greater LPs than investment grade default swaps.