Liquidity commonalities in the corporate CDS market around the 2007-2012 financial crisis

This study presents robust empirical evidence suggesting the existence of significant liquidity commonalities in the corporate Credit Default Swap (CDS) market. Using daily data for 401 firms from 24 countries in the period 2005-2012 we find that these commonalities vary over time, being stronger in periods in which the global, counterparty, and funding liquidity risks increase. However, commonalities do not depend on firm's characteristics. The level of the liquidity commonalities differs across economic areas being on average stronger in the European Monetary Union. The effect of market liquidity is stronger than the effect of industry-specific liquidity. Finally, we document the existence of asymmetries in commonalities around financial distress episodes such that the effect of market liquidity is stronger when the CDS market price increases.