Understanding transactions prices in the credit default swaps market

The price determination of over-the-counter derivatives is a major concern for market participants and policy makers since the recent global financial crisis, which triggered substantial law-making and new regulations. We use a unique, comprehensive dataset to examine the tick-by-tick price changes associated with both trades and quotes on credit default swaps (CDS). We find that, while fundamental factors such as volatility are important drivers of CDS spread changes, especially during the crisis period, CDS spread movements are also affected by supply-demand imbalance and market liquidity, reflecting the impact of slow-moving capital, as well as the capacity constraints of financial intermediation.