Do sovereign credit default swaps represent a clean measure of sovereign default risk? A factor model approach

► We use a factor model in order to decompose CDS into default, liquidity and correlation components. ► We calibrate the model to CDS and bonds. ► We find that sovereign CDS spreads are highly impacted by liquidity risk. ► We find that sovereign bond spreads are less subject to liquidity friction. ► Sovereign bond spreads represent a better proxy for sovereign default risk than CDS spreads.